CHAPTER 1

INTRODUCTION

Introduction
Microfinance is defined as any activity that includes the provision of financial services such as credit,
savings, and insurance to low income individuals which fall just above the nationally defined poverty
line, and poor individuals which fall below that poverty line, with the goal of creating social value. The
creation of social value includes poverty alleviation and the broader impact of improving livelihood
opportunities through the provision of capital for micro enterprise, and insurance and savings for risk
mitigation and consumption smoothing. A large variety of sectors provide microfinance in India, using
a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have
endeavored to provide access to financial services to the poor in creative ways. Governments also have
piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending,
and some banks have partnered with public organizations or made small inroads themselves in
providing such services. This has resulted in a rather broad definition of microfinance as any activity
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that targets poor and low-income individuals for the provision of financial services. The range of
activities undertaken in microfinance include group lending, individual lending, the provision of
savings and insurance, capacity building, and agricultural business development services. Whatever
the form of activity however, the overarching goal that unifies all actors in the provision of
microfinance is the creation of social value.
Microfinance Definition
According to International Labor Organization (ILO), Microfinance is an economic development
approach that involves providing financial services through institutions to low income clients.
In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as
provision of thrift, credit and other financial services and products of very small amounts to the poor
in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living
standards.
"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of finance is management of money. The management of money denotes
acquiring & using money. Micro Finance is buzzing word, used when financing for micro
entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower underprivileged class of society, women, and poor, downtrodden by natural reasons or men made; caste,
creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of
cooperation and its central values of equality, equity and mutual self-help. At the heart of these
principles are the concept of human development and the brotherhood of man expressed through
people working together to achieve a better life for themselves and their children.
Traditionally micro finance was focused on providing a very standardized credit product. The poor,
just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able
to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening
of the concept of micro finance--- our current challenge is to find efficient and reliable ways of
providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but
extending credit to those who require most for their and familys survival. It cannot be measured in
term of quantity, but due weightage to quality measurement. How credit availed is used to survive and
grow with limited means.
Concept and Features of Micro-finance:
1. It is a tool for empowerment of the poorest.
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2. Delivery is normally through Self Help Groups (SHGs).

3. It is essentially for promoting self-employment, generally used for:
(a) Direct income generation
(b) Rearrangement of assets and liabilities for the household to participate in future
opportunities and
(c) Consumption smoothing.
4. It is not just a financing system, but a tool for social change, specially for women.
5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic
the informal lenders rather than the formal sector lending. It has to:
(a) Provide for seasonality
(b) Allow repayment flexibility
(c) Fix a ceiling on loan sizes.

Microfinance approach is based on certain proven truths which are not always recognized. These are:
1. That the poor are bankable; successful initiatives in micro finance demonstrate that there need
not be a tradeoff between reaching the poor and profitability - micro finance constitutes a
statement that the borrowers are not weaker sections in need of charity, but can be treated as
responsible people on business terms for mutual profit .
2. That almost all poor households need to save, have the inherent capacity to save small amounts
regularly and are willing to save provided they are motivated and facilitated to do so.
3. That easy access to credit is more important than cheap subsidized credit which involves
lengthy bureaucratic procedures - (some institutions in India are already lending to groups or
SHGs at higher rates - this may prevent the groups from enjoying a sufficient margin and
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rapidly accumulating their own funds, but members continue to borrow at these high rates,
even those who can borrow individually from banks).
4. 'Peer pressure' in groups helps in improving recoveries.

CHAPTER 2
LITRATURE REVIEW

Mohammed AnisurRahaman (2007)

Has examined that about microfinance and to investigate the impact of microfinance on the poor
people of the society with the main focus on Bangladesh. We mainly concise our thesis through
clients (the poor people, who borrowed loan from microfinance institutions) perspective and build up
our research based on it. Therefore, the objective of this study is to show how microfinance works, by
using group lending methodology for reducing poverty and how it affects the living standard (income,
saving etc.) of the poor people in Bangladesh. Microfinance has the positive impact on the standard of

living of the poor people and on their life style. It has not only helped the poor people to come over the
poverty line, but has also helped them to empower themselves.
SusyCheston (2002)
Has examined that Microfinance has the potential to have a powerful impact on womens
empowerment. Although microfinance is not always empowering for all women, most women do
experience some degree of empowerment as a result. Empowerment is a complex process of change
that is experienced by all individuals somewhat differently. Women need, want, and profit from credit
and other financial services. Strengthening womens financial base and economic contribution to their
families and communities plays a role in empowering them. Product design and program planning
should take womens needs and assets into account. By building an awareness of the potential impacts
of their programs, MFIs can design products, services, and service delivery mechanisms that mitigate
negative impacts and enhance positive ones.
Linda Mayoux (Feb 2006)
Has examined that Micro-finance programmes not only give women and men access to savings and
credit, but reach millions of people worldwide bringing them together regularly in organized groups.
Through their contribution to womens ability to earn an income, micro-finance programmes can
potentially initiate a series of virtuous spirals of economic empowerment, increased well-being for
women and their families and wider social and political empowerment Banks generally use individual
rather than group-based lending and may not have scope for introducing non-financial services. This
means that they cannot be expected to have the type of the focused empowerment strategies which
NGOs have
EoinWrenn (2005)
Has examined that microfinance creates access to productive capital for the poor, which together with
human capital, addressed through education and training, and social capital, achieved through local
organization building, enables people to move out of poverty (1999). By providing material capital to a
poor person, their sense of dignity is strengthened and this can help to empower the person to
participate in the economy and society. The impact of microfinance on poverty alleviation is a keenly
debated issue as we have seen and it is generally accepted that it is not a silver bullet, it has not lived
up in general to its expectation (Hulmeand Mosley, 1996). However, when implemented and managed
carefully, and when services are designed to meet the needs of clients, microfinance has had positive
impacts, not just on clients, but on their families and on the wider community.
Cheston& Kuhn (2004)
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Has examined that in their study concluded that micro-finance programmes have been very successful
in reaching women. This gives micro-finance institutions an extraordinary opportunity to act
intentionally to empower poor women and to minimize the potentially negative impacts some women
experiences. We also found increased respect from and better relationships with extended family and
in-laws. While there have been some reports of increased domestic violence, Hashemi and Schuler
found a reduced incidence of violence among women who were members of credit organizations than
among the general population.
Dr. JyotishPrakashBasu (2006)
Has examined that the two basic research questions. First, the paper tries to attempt to study how a
womans tendency to invest in safer investment projects can be linked to her desire to raise her
bargaining position in the households. Second, in addition to the project choice, women empowerment
is examined with respect to control of savings, control of income, control over loans, control over
purchasing capacity and family planning in some sample household in Hooghly district of West
Bengal. The empowerment depends on the choice of investment of project. The choice of safe project
leads to more empower of women than the choice of uncertain projects. The Commercial Banks and
Regional Rural banks played a crucial role in the formation of groups in the SHGs -Bank Linkage
Program in Andhra Pradesh whiles the Cooperative Banks in West Bengal.
Chintamani Prasad Patnaik (March 2012)
Has examined that microfinance seems to have generated a view that microfinance development could
provide an answer to the problems of rural financial market development. While the development of
microfinance is undoubtedly critical in improving access to finance for the unserved and underserved
poor and low-income households and their enterprises, it is inadequate to address issues of rural
financial market development. It is envisaged that self-help groups will play a vital role in such
strategy. But there is a need for structural orientation of the groups to suit the requirements of new
business. Microcredit movement has to be viewed from a long-term perspective under SHG
framework, which underlines the need for a deliberate policy implication in favour of assurance in
terms of technology back-up, product market and human resource development.
Hunt, J &Kasynathan (2002)
Has examined that poor women and men in the developing world need access to microfinance and
donors should continue to facilitate this. Research suggests that equity and efficiency arguments for
targeting credit to women remain powerful: the whole family is more likely to benefit from credit
targeted to women, where they control income, than when it is targeted to men. Microfinance must
7

also be re-assessed in the light of evidence that the poorest families and the poorest women are not
able to access credit. A range of microfinance packages is required to meet the needs of the poorest,
both women and men. Donors need to revisit arguments about the sustainability of microfinance
programmes. Financial sustainability must be balanced against the need to ensure that some credit
packages are accessible to the poorest.
R.Prabhavathy (2012)
Has examined that collective strategies beyond micro-credit to increase the endowments of the
poor/women enhance their exchange outcomes the family, markets, state and community, and sociocultural and political spaces are required for both poverty reduction and women empowerment. Even
though there were many benefits due to micro-finance towards women empowerment and poverty
alleviation, there are some concerns. First, these are dependent on the programmatic and institutional
strategies adopted by the intermediaries, second, there are limits to how far micro-credit interventions
can alone reach the ultra-poor, third the extent of positive results varies across household headship,
caste and religion and fourth the regulation of both public and private infrastructure in the context of
LPG to sustain the benefits of social service providers.
Reginald Indon (2007)
Has examined that informal businesses represent a very large cross-section of economic enterprises
operating in the country. Informal businesses may be classified as either the livelihood/ survival type
or the entrepreneurial/ growth-oriented type. Livelihood enterprises are those which show very limited
potential for growth in both income and employment generation. There are existing policies, program
and services that directly/ indirectly cover informal. Variety of support programs, services and
information are currently being offered by different institutions. These programs and support services
fail to reach or remain inaccessible to informal business operators and owners. This is borne out of and
perpetuated by lopsided economic policies and poor governance that inadvertently encumber informal
businesses from accessing mainstream resources and services.
Mallory A. Owen (2006)
Has examined that microfinance has signaled a paradigm shift in development ideology. Using my
experiences with microfinance in a fishing village in Senegal, this study will address the claims driving
the microfinance movement, debate its pros and cons and pose further questions about its validity and
widespread implementation. Instead of lifting people out of poverty and empowering women,
microfinance may have regressive long term potential for borrowers. How loans get used is a central
theme of this essay. How microfinance and the notion of the entrepreneur fit into the rural,
8

Senegalese cultural context is also addressed. Microfinance programs should be implemented with
complementary measures that challenge the systematic causes of inequality examined in this article.
The microfinance model (group lending based on joint liability) uses the social capital generated by
group membership to ensure that loans get re-financed. If one woman fails to pay back her loan, she
puts her entire loan group at jeopardy. As a result, Womens participation in microenterprise does not
show any signs of creating the new forms of solidarity among women that the advocates of
empowerment desire. Instead, women are placed under enormous pressure to maintain existing modes
of social relationships, on which depends not only the high rates of loan repayments but also the
survival of families.
Jennifer Meehan (2004)
Has examined that it will need to do three things simultaneously. First, it will need to rapidly scale up,
in key markets, like India, home to high numbers of the worlds poor. Second, in this process, clear
priority is needed for philanthropic, quasi-commercial and commercial financing for the business plans
of MFIs targeting the poorest segments of the population, especially women. Third, microfinance will
need to realize its possibility as a broad platform and movement, more than simply an intervention and
industry. The pioneering financings completed by leading, poverty-focused MFIs have shown the
industry what is possible large amounts of financing that allows for rapid expansion of financial
services to new poor customers. The MFIs offer a model to others that are interested in tapping the
financial markets. If leading MFIs continue on their present course and adopt some or all of the
suggestions offered, financial market interest or more specifically, debt capital market interest in
leading, poverty-focused MFIs is expected to grow.
Jacob Levitsky and Leny van Oyen (1999)
Has examined that micro-businesses to large corporations, located in large urban centres, in rural areas
and in the formal and informal sectors. Financing needs are therefore of varying nature. In describing
experiences, a link is made between size of enterprises, financing schemes/instruments and typical
delivery channels. When referring to enterprises in this paper, focus is predominantly on businesses,
both existing and potential, in the manufacturing sector and related services. It is clear from this paper
that increasing the volume of finance available and the delivery of such funds in various appropriate
forms, to support enterprises in Africa, is a difficult challenge. Central banks have to be given more
independence, strengthened with qualified, experienced personnel, able to fulfil adequately the role of
supervising and monitoring the performance of commercial banks in the provision of loans to those
enterprises able to make effective use of them. Formal financial institutions such as commercial banks
and, in a few cases, development banks, have to be encouraged and pressed to make appropriate loans
to those who have proved themselves by paying off a number of loans they have received from NGOs
9

or from formal financial institutions. The minimalist credit approach has clear limitations, and for
credit schemes to be effective and have impact, complementary services are needed.
Marguerite S. Robinson (1995)
Has examined that HIID's role in the formulation of the initial hypotheses and HIID's contributions in
planning and coordinating the underlying research, advising on the policies and implementation
strategies that put concept into practice, analysing the results, and disseminating the findings. Drawing
on work in Asia, Africa, and Latin America, the paper analyses the paradigm shift in microfinance
from government and donor-funded subsidized credit to sustainable financial intermediation. This shift
has occurred because of the work of many people in many countries. This paper, however, is limited to
HIID's contribution. The policy implications of the 'new microfinance' for governments, donors, banks,
and NGOs are explored. HIID is advising BRI on its program for international visitors. In addition,
HIID is analysing and teaching - in universities, financial institutions, donor agencies, bank
superintendences, and NGOs - the principles and the results of the new microfinance paradigm.
Pillai (1995)
Has examined that the emergence of liberalization and globalization in early 1990's aggravated the
problem of women workers in unorganized sectors from bad to worse as most of the women who were
engaged in various self-employment activities have lost their livelihood. Microfinance is emerging as a
powerful instrument for poverty alleviation in the new economy. In India, Microfinance scene is
dominated by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective mechanism for
providing financial services to the "Unreached Poor" which has been successful not only in meeting
financial needs of the rural poor women but also in strengthening collective self-help capacities of the
poor leading to their empowerment. Micro finance is necessary to overcome exploitation, create
confidence for economic self-reliance of the rural poor, particularly among rural women who are
mostly invisible in the social structure. Micro finance can contribute to solving the problems of
inadequate housing and urban services as an integral part of poverty alleviation programmes. The
challenge lies in finding the level of flexibility in the credit instrument that could make it match the
multiple credit requirements of the low income borrower without imposing unbearably high cost of
monitoring its end use upon the lenders.
Crabb, P. (2008)
Has examined that the relationship between the success of microfinance institutions and the degree of
economic freedom in their host countries. Many microfinance institutions are currently not selfsustaining and research suggests that the economic environment in which the institution operates is an
10

important factor in the ability of the institution to reach this goal, furthering its mission of outreach to
the poor. The sustainability of the micro lending institutions is analyzed here using a large crosssection of institutions and countries. The results show that microfinance institutions operate primarily
in countries with a relatively low degree of overall economic freedom and that various economic
policy factors are important to sustainability.
Fehr, D. and G. Hishigsuren. (2006)
Has examined that microfinance institutions (MFIs) provide financial services to the poorest
households. To date, funding of MFI activities has come primarily from outright donor grants,
government subsidies, and often debt capital, including debt with non-market terms favorable to the
MFI. These traditional sources of MFI financing may not be sufficient to allow MFIs to provide
maximum services. There is a subset of the pool of mainstream equity investors who would consider
investing in MFI opportunities, even knowing that they would not expect to earn the full economic rate
of return that such investments would otherwise require. However, as part of their investment
evaluation process, these investors would ask: What would the market determine required expected
rate of return for my MFI investment be? What return on investment (ROI) do I expect to earn on my
MFI investment? Is the difference in the above two returns acceptable given my level of social
motivation? How will I "monetize" my investment and when? The purpose of this article is to employ
modern corporate finance techniques to address these questions.
Demirguc-Kunt, A. and Martinez, P.M.S. (2005)
Has examined that this paper (i) presents new indicators of banking sector penetration across 99
countries, based on a survey of bank regulatory authorities, (ii) shows that these indicators predict
household and firm use of banking services, (iii) explores the association between the outreach
indicators and measures of financial, institutional, and infrastructure development across countries, and
(iv) relates these banking outreach indicators to measures of firms financing constraints. In particular,
we find that greater outreach is correlated with standard measures of financial development, as well as
with economic activity. Controlling for these factors, we find that better communication and transport
infrastructure, and better governance are also associated with greater outreach. Government ownership
of financial institutions translates into lower access, while more concentrated banking systems are
associated with greater outreach. Finally, firms in countries with higher branch and ATM penetration
and higher use of loan services report lower financing obstacles, thus linking banking sector outreach
to the alleviation of firms financing constraints.
Srinivasan, Sunderasan (2007)

11

Has examined that micro banking facilities have helped large numbers of developing country nationals
by supporting the establishment and growth of microenterprises. And yet, the microfinance movement
has grown on the back of passive replication and needs to be revitalised with new product offerings
and innovative service delivery. Renewable Energy systems viz., solar home systems, biogas digesters,
etc., serve to improve indoor air quality, provide superior light and extend working and study hours.
Such applications are not inherently income generating and returns on such investments accrue from
cost avoidance, but should qualify for micro funding, as such 'quality of life' investments, reflect
borrower maturity and simultaneously contribute to MFI sustainability.
Basu, P., Srivastava (2005)
Has examined that the current level and pattern of access to finance for India's rural poor and examines
some of the key microfinance approaches in India, taking a close look at the most dominant among
these, the Self Help Group (SHG) Bank Linkage initiative. It empirically analyzes the success with
which SHG Bank Linkage has been able to reach the poor, examines the reasons behind this, and the
lessons learned. The analysis in the paper draws heavily on a recent rural access to finance survey of
6,000 households in India, undertaken by the authors. The main findings and implications of the paper
are as follows: India's rural poor currently have very little access to finance from formal sources.
Microfinance approaches have tried to fill the gap. Among these, the growth of SHG Bank Linkage
has been particularly remarkable, but outreach remains modest in terms of the proportion of poor
households served. The paper recommends that, if SHG Bank Linkage is to be scaled-up to offer mass
access to finance for the rural poor, then much more attention will need to be paid towards: the
promotion of high quality SHGs that are sustainable, clear targeting of clients, and ensuring that banks
linked to SHGs price loans at cost-covering levels. At the same time, the paper argues that, in an
economy as vast and varied as India's, there is scope for diverse microfinance approaches to coexist.
Private sector micro financiers need to acquire greater professionalism, and the government, too, can
help by creating a flexible architecture for microfinance innovations, including through a more
enabling policy, legal and regulatory framework. Finally, the paper argues that, while microfinance
can, at minimum, serve as a quick way to deliver finance to the poor, the medium-term strategy to
scale-up access to finance for the poor should be to 'graduate' microfinance clients to formal financial
institutions. The paper offers some suggestions on what it would take to reform these institutions with
an eye to improving access for the poor.
Robinson, M. (2001)
Has examined that the timing of this book is excellent it has few close substitutes in terms of its
sweeping overview of the terrain, and the revolution is now so advanced that the time is right for a
history, or at least a retrospective. As with any revolution, however, splits have emerged within the
12

movement. On one side are those who argue that the way forward is to require microfinance
institutions to meet the test of financial sustainability essentially, requiring these institutions to cover
their costs, even if this means that the very poorest of the poor remain under-served. Against this, the
poverty lending approach emphasizes the importance of outreach, especially to the very poorest
borrowers, as a poverty fighting approach.
Gallardo, Joselito (1999)
Has examined that the Bank should maximize opportunities to expand the use of leasing as an
approach to financial intermediation in Bank projects to promote the development of small businesses
and microenterprises. In most developing countries, capital markets are relatively undeveloped and
banks are often unable or unwilling to undertake term lending. Operations in microenterprises and
small businesses are cash-flow-oriented but rarely have organized historical financial records or the
assets needed for collateral for conventional bank financing. Gallardo explores the potential of leasing
as an option to expand small businesses' access to medium-term financing for capital equipment and
new technology. In a lease-financing contract, the lessor-financier retains ownership of the asset, lease
payments can be tailored to fit the cash-flow generation patterns of the lessee-borrower's business, and
the security deposit is smaller than the equity stake required in conventional bank financing. Other
small businesses require medium-term financing to acquire the tools and equipment needed to support
production growth and expansion. Gallardo examines and compares the Bank's experience: Lease
financing was used to promote the development of small businesses in Pakistan, as part of a
microenterprise development loan project. For a Bank-supported alternative-energy project in
Indonesia, a variant of lease financing-the hire-purchase contract-is being used in marketing and
distribution by private distributors of photovoltaic solar home systems. Lease financing was used by
Grameen Trust in Bangladesh to finance the purchase of small tools and equipment and in other
countries to promote the growth of alternative energy systems. This paper-a product of the
Development Research Group-is part of a larger effort in the group to identify appropriate policies for
environmental regulation in developing countries. The study was funded by the Bank's Research
Support Budget under the research project "The Economics of Industrial Pollution Control in
Developing Countries"
Muhammad Yunus (1998)
Has examined that this approach to poverty reduction at the macro-level is inadequate. The primary
causes of poverty are not lack of human capital or lack of demand for labor. Lack of demand for labor
is only a symptom, not a cause, of poverty. Poverty is caused by our inadequate understanding of
human capabilities and by our failure to create enabling theoretical frameworks, concepts, institutions
and policies to support those capabilities. My main argument is that economics as we know it is not
13

only unhelpful in getting the poor out of poverty; it may even be a hindrance. In this paper, I would
like to explore those institutions that perpetuate poverty, share my experiences with an effective
poverty alleviation institution, and present my thoughts on the future of poverty alleviation. Before
addressing these points, however, I would like to provide a useful framework to define the concept of
"the poor" more concretely.
Ashta, A. & De Selva, R. (2009)
Hass examined that the relationship between microfinance and religion, and provides future research
directions in this area. Religious institutions often play a crucial role in establishing microfinance
systems, but interactions between microfinance and religion have received little attention of
researchers. Some of the topics addressed by articles reviewed in this paper include the impact of the
Great Irish Famine on Irish loan funds, indigenization within support groups for chronically ill Haitian
women, impact of religion on borrowing patterns of Jordanian micro-entrepreneurs, Islamic
microfinance in Pakistan and Indonesia, spirituality as an asset in a Christian initiative role of religious
leaders in identifying entrepreneurial talent, microfinance and charity in Thailand and the Philippines,
and extensive socio-economic studies in Bangladesh and India.
Ernest Aryeetey (2005)
Has examined that informal finance and microfinance suitable for financing growing small to medium
size enterprises (SMEs) in Sub-Saharan Africa? First, I present the characteristics of informal finance,
focusing on size, structure, and scope of activities. Informal finance has not been very attractive for the
private sector. Indeed, the informal sector has considerable experience and knowledge about dealing
with small borrowers, but there are significant limitations to what it can lend to growing
microbusinesses. Second, I discuss some recent trends in microfinance. While externally driven
microfinance projects have surfaced in Africa, their performance relative to small business finance has
not been as positive as in Asia and Latin America. Third, I introduce some possible steps toward a new
reform agenda that will make informal and microfinance relevant to private sector development,
including focusing on links among formal, semi-formal and informal finance and how these links can
be developed.
Yunus (2003)
Has examined that count 130 McMaster School for Advancing Humanity on women to spread the
word to their neighbors and friends about the success of these loans. The testimony is expected to
convince others to seek out Grameen for help. Yunus also encourages members to save some of their
money in case they fall on hard times, such as natural disasters, or to use this money for other
14

opportunities. In 1977, Yunus founded Grameen Bank after working for six months to get a loan from
the Janata Bank. Yunus realized that having groups of people take out a loan was a better plan for
success than giving loans to individuals. He describes the process by which Grameen Bank lends
money. Loan repayments are to be made in very small amounts, and in the first project, Yunus chose a
villager to be in charge of collecting the repayments.
Monique Cohen (2002)
Has examined that the ideas presented in this paper are designed to direct the arena of discourse
towards a more holistic market driven or client focused microfinance agenda. Currently, the debate on
market-driven microfinance is primarily framed by the problems of competition and dropouts among
established MFIs. The solutions to the problems are defined in terms of more responsive products, the
creation of new products, and the restructuring of existing ones. Appropriate products will not only
benefit the operations of an institution they will also have a positive impact on the wellbeing of the
client, reducing the risk of borrowing and the poors vulnerability. In presenting current thinking on a
client-led agenda, this paper finds itself in a precarious position in the midst of this debate. Client-led
models are still in their infancy, and the fact that this topic is the theme of this special edition of the
Journal of Development Studies is itself an important milestone. When this author began to focus on
clients in microfinance six years ago, the notion that clients deserved a voice in the design and delivery
of services was dismissed out of hand.
Shannon Doocy, Dan Norell, ShimelesTeffera, and Gilbert Burnham (2005)
Has examined that Management decision making in MFIs is becoming increasingly tied to collecting
information about social performance. This paper examines the impact of participation in an Ethiopian
microfinance program on indicators of socioeconomic status including wealth, income, and home or
land ownership. A survey assessing these outcomes was conducted in May 2003 in two predominantly
rural sites in Southern Ethiopia and included 819 households. The article discusses management
decisions made as the result of survey findings about socioeconomic status and food security to
increase retention rates and to facilitate client savings. Additionally, the management was prompted to
increase the number of female clients and raise the proportion of female loan officers. This paper
illustrates how data from routine monitoring and evaluation can be linked to MFI management
decision making, which ultimately results in providing better microfinance services. Household asset
data indicates that participation in the WISDOM microfinance program did not result in increased
household wealth. Significant differences in household income were not observed between participant
groups in either survey site and client status was not a significant predictor of income in univariate or
multivariate regression models.
15

John A. Brett. (2006)

Has examined that having borrowed money from a microfinance organization to start a small business,
many women in El Alto, Bolivia are unable to generate sufficient income to repay their loans and so
must draw upon household resources. Working from the women's experience and words, this article
explores the range of factors that condition and constrain their success as entrepreneurs. The central
theme is that while providing the poor access to credit is currently very popular in development circles,
the social and structural context within which some women operate so strongly constrains their
productive activity that they realize a net income loss at the household level instead of the promised
benefits of entrepreneurship. This paper explores the social and structural realities in which women
seek out and accept debt beyond their capacity to repay from the proceeds of their business enterprise.
By examining some of the "hidden costs" of microfinance participation, this paper argues for a shift
from evaluation on outcomes at the institutional level to outcomes at the household level to identify the
forces and factors that condition women's success as micro-entrepreneurs. While there has been much
discussion on the benefits of microcredit lending and increasing critique of it on both ideological and
substantive grounds, there have been few ethnographically informed studies on consequences to users.
NidhiyaMenon (2006)
Has examined that this paper studies the benefits of participation in micro-finance programs, where
benefits are measured in terms of the ability to smooth the effect of seasonal shocks that cause
consumption fluctuations. It is shown that although membership in these programs is an effective
instrument in combating inter-seasonal consumption differences, there is a threshold level of length of
participation beyond which benefits begin to diminish. Returns from membership are modelled using
an Euler equation approach. Fixed effects non-linear least squares estimation of parameters using data
from 24 villages of the Grameen Bank suggests that returns to participation, as measured by the ability
to smooth seasonal shocks, begin to decline after approximately two years of membership. This
implies that membership alone no longer has a mitigating marginal effect on seasonal shocks to per
capita consumption after four years of participation. Such patterns suggest that the ability to smooth
consumption as a function of length of membership, need not accrue indefinitely in a linear fashion.;
Reprinted by permission of Frank Cass & Co. Ltd.

16

CHAPTER 3
INDUSTRY PROFILE

The Origin of Microfinance

17

Although neither of the terms microcredit or microfinance were used in the academic literature nor by
development aid practitioners before the 1980s or 1990s, respectively, the concept of providing
financial services to low income people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the 15th century, they
were first established in Europe during the 18th century as a response to the enormous increase in
poverty since the end of the extended European wars (1618 1648). In 1720 the first loan fund
targeting poor people was founded in Ireland by the author Jonathan Swift. After a special law was
passed in 1823, which allowed charity institutions to become formal financial intermediaries a loan
fund board was established in 1836 and a big boom was initiated. Their outreach peaked just before the
government introduced a cap on interest rates in 1843. At this time, they provided financial services to
almost 20% of Irish households. The credit cooperatives created in Germany in 1847 by Friedrich
Wilhelm Raiffeisen served 1.4 million people by 1910. He stated that the main objectives of these
cooperatives should be to control the use made of money for economic improvements, and to improve
the moral and physical values of people and also, their will to act by themselves.
In the 1880s the British controlled government of Madras in South India, tried to use the German
experience to address poverty which resulted in more than nine million poor Indians belonging to
credit cooperatives by 1946. During this same time the Dutch colonial administrators constructed a
cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became
Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.
EVOLUTION OF MICROFINANCE IN INDIA (1960 TO TODAY)
Microfinance in India emerged as an effort to reach out to the un-banked, lower income segments of
the population
1960 to 1980

1990

2000

Phase 1: Social Banking

Phase 2: Financial Systems

Phase 3: Financial Inclusion

Approach
1.Nationalization

of

private 1.Peer-pressure

1.NGO-MFIs and SHGs gaining

commercial banks

more legitimacy

2.Expansion of rural branch 2.Establishment of

2.MFIs emerging as strategic

network

MFIs,typically of non-profit

partners to diverse entities

origins

interested in thelow-income
segments

3.Extension of subsidized credit

3.Consumer finance emerged

ashighgrowth area

18

4.Establishment of Rural

4.Increased policy regulation

Regional Banks
5.Establishment of apex

5.Increasing commercialization

institutionssuch as National
Bank for Agricultureand Rural
Development and SmallIndustries Development Bank of
India

Table 3.1
Phase 1: In the 1960s, the credit delivery system in rural India was largely dominated by the
cooperative segment. The period between 1960 and 1990, referred to as the social banking phase.
This phase includes nationalization of private commercial banks, expansion of rural branch networks,
extension of subsidized credit, establishment of Regional Rural Banks (RRBs) and the establishment
of apex institutions such as the National Bank for Agriculture and Rural Development (NABARD) and
the Small scale Industries Development Board of India (SIDBI).
Phase 2: After 1990, India witnessed the second phase financial system approach of credit delivery.
In this phase NABARD initiated the Self Help Group (SHG) - Bank Linkage Bank Linkage program,
which links informal women's groups to formal banks. This concept held great appeal for nongovernment organizations (NGOs) working with the poor, prompting many of them to collaborate with
NABARD in the program. This period also witnessed the entry of Microfinance Institutions (MFIs),
largely of non-profit origins, with existing development programs.
Phase 3: In 2000, the third phase in the development of Indian microfinance began, marked by further
changes in policies, operating formats, and stakeholder orientations in the financial services space.
This phase emphasizes on inclusive growth and financial inclusion. This period also saw many
NGO-MFIs transform into regulated legal formats such as Non-Banking Finance Companies (NBFCs).
Commercial banks adopted innovative ways of partnering with NGO-MFIs and other rural
organizations to extend their reach into rural markets. MFIs have emerged as strategic partners to
individuals and entities interested in reaching out to India's low income client segments.

Policy Attention to Microfinance After 2000

1999 --- Official definition of microfinance by RBI
19

August 2000 --- 'Micro Credit/Rural Credit' included in the list of permitted non-banking financial
company (NBFC) activities considered for Foreign Direct Investment (FDI)
2005 --- MFIs acknowledged for the first time in the Budget Speech by the Finance Minister
Government intends to promote MFIs in a big way. The way forward, I believe, is to identify MFIs,
classify and rate such institutions, and empower them to intermediate between the lending banks and
the beneficiaries.
January 2006 --- Announcement of the business correspondent model
February 2006 --- Budget Speech by the Finance Minister promises a formal statutory framework for
the promotion, development and regulation of the microfinance sector
March 2006 --- Comprehensive guidelines by RBI on loan securitization
July 2006 --- RBI master circular allows NGOs involved in microfinance to access External
Commercial Borrowings (ECB) up to USD 5 million (INR 20.25 crores) during a year.
March 2007 --- Finance Minister introduces the Micro Finance Sector Development and Regulation
Bill 2007 in LokSabha
Entities in Micro Finance:Indian Microfinance dominated by two operational approaches:
SHG

Initiated by NABARD through SHG Bank Linkage Program.

Largest outreach to microfinance clients in the world.

MFIs

Emerged in the late 1990s to harness social and commercial funds.

Today the number of Indian MFIs has increased and crossed 1000.

SHGs and MFIs disbursement till 2007- USD 3.7 billions

SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes
and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund.
Members may borrow from the group fund for a variety of purposes ranging from household
emergencies to school fees. Banks typically lend up to four rupees for every rupee in the group fund.
Groups pay a reasonable 12-24% annual rate of interest. Nearly 1.4 million SHGs comprising
approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank
Linkage model the largest microfinance program in the world.
20

MFI is an organization that offers financial services to low income populations. Almost all of these
offer microcredit and only take back small amounts of savings from their own borrowers, not from the
general public. Term refers to a wide range of organizations - NGOs, credit unions, cooperatives,
private commercial banks and non-bank financial institutions.
Microfinance Today
In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor
driven institutions to meet the demand for financial services in developing countries let to several new
approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia
without any subsidies and is now well-known as the earliest bank to institute commercial
microfinance. While this is not true with regard to the achievements made in Europe during the 19th
century, it still can be seen as a turning point with an ever increasing impact on the view of politicians
and development aid practitioners throughout the world. In 1973 ACCION International, a United
States of America (USA) based non-governmental organization (NGO) disbursed its first loan in
Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen
Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed
Womens Association started to provide loans of about $1.5 to poor women in India. Although the
latter examples still were subsidized projects, they used a more business oriented approach and showed
the world that poor people can be good credit risks with repayment rates exceeding 95%, even if the
interest rate charged is higher than that of traditional banks. Another milestone was the transformation
of BRI starting in 1984. Once a loss making institution channeling government subsidized credits to
inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even during the
Asian financial crisis of 1997 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of
various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine yearlong campaign to
reach 100 million of the world poorest households with credit for self-employment by 2005.
According to the Microcredit Summit Campaign Report 67,606,080 clients have been reached through
2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the poorest before they took
their first loan. Since the campaign started the average annual growth rate in reaching clients has been
almost 40 percent. If it has continued at that speed more than 100 million people will have access to
microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be
reached. As the president of the World Bank James Wolfensohn has pointed out, providing financial
services to 100 million of the poorest households means helping as many as 500 600 million poor
people.
21

Need for Micro-Finance: The gap between Demand and Supply

Since independence, various governments in India have experimented with a large number of grant
and subsidy based poverty alleviation programmes. These programmes were based on grant/subsidy
and the credit linkage was through commercial banks only.
Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like
Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines
etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of
extending credit to the poorest sector and took a no. of steps to promote micro-financing in the
country. Since the 1950s, various governments in India have experimented with a large number of
grant and subsidy based poverty alleviation programmes. Studies show that these mandatory and
dedicated subsidized financial programmes, implemented through banking institutions, have not been
fully successful in meeting their social and economic objectives:

The common features of these programmes were:

Target orientation

Based on grant/subsidy, and

Credit linkage through commercial banks.

These programmes:

Were often not sustainable

Perpetuated the dependent status of the beneficiaries

Depended ultimately on government employees for delivery

Led to misuse of both credit and subsidy and

Were treated at best as poverty alleviation interventions.

Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do not have access to formal financial
institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In
rural areas, they are usually small farmers and others who are engaged in small income-generating
activities such as food processing and petty trade. In urban areas, micro finance activities are more
diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients
are poor and vulnerable non-poor who have a relatively unstable source of income.
Access to conventional formal financial institutions, for many reasons, is inversely related to income:
the poorer you are the less likely that you have access. On the other hand, the chances are that, the
poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal
22

arrangements may not suitably meet certain financial service needs or may exclude you anyway.
Individuals in this excluded and under-served market segment are the clients of micro finance.
As we broaden the notion of the types of services micro finance encompasses, the potential market of
micro finance clients also expands. It depends on local conditions and political climate, activeness of
cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more
limited market scope than say a more diversified range of financial services, which includes various
types of savings products, payment and remittance services, and various insurance products. For
example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to
save the proceeds from their harvest as these are consumed over several months by the requirements of
daily living. Central government in India has established a strong & extensive link between NABARD
(National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative
Banks, Primary Agriculture & Marketing Societies at national, state, district and village level.
The Need in India:

India is said to be the home of one third of the worlds poor; official estimates range from 26 to
50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit.

The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2
billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the global
efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the worlds
poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is
now widely accepted as an effective poverty alleviation strategy. Over the last five years, the
microfinance industry has achieved significant growth in part due to the participation of commercial
banks. Despite this growth, the poverty situation in India continues to be challenging.
Some principles that summarize a century and a half of development practice were encapsulated in
2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at
the G8 Summit on June 10, 2004:

Poor people need not just loans but also savings, insurance and money transfer services.

Microfinance must be useful to poor households: helping them raise income, build up assets
and/or cushion themselves against external shocks.

Microfinance can pay for itself.Subsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.

Microfinance means building permanent local institutions.

23

Microfinance also means integrating the financial needs of poor people into a countrys
mainstream financial system.

The job of government is to enable financial services, not to provide them.

Donor funds should complement private capital, not compete with it.

The key bottleneck is the shortage of strong institutions and managers. Donors should focus
on capacity building.

Interest rate ceilings hurt poor people by preventing microfinance institutions from covering
their costs, which chokes off the supply of credit.

Microfinance institutions should measure and disclose their performance both financially and
socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are
destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This
situation can occur for example, in a war zone or after a natural disaster.
Financial needs and Financial services:In developing economies and particularly in the rural areas, many activities that would be classified in
the developed world as financial are not monetized: that is, money is not used to carry them out.
Almost by definition, poor people have very little money. But circumstances often arise in their lives
in which they need money or the things money can buy.
In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood,

old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating
and exchanging different forms of non-cash value. Common substitutes for cash vary from country to
country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance began
to develop as an industry. In the 2000s, the microfinance industrys objective is to satisfy the unmet
demand on a much larger scale, and to play a role in reducing poverty. While much progress has been
24

made in developing a viable, commercial microfinance sector in the last few decades, several issues
remain that need to be addressed before the industry will be able to satisfy massive worldwide
demand.
The obstacles or challenges to building a sound commercial microfinance industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking MFIs

Few MFIs that mobilize savings

Limited management capacity in MFIs

Institutional inefficiencies

Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Role of Microfinance:The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with
promise of providing credit to the poor without collateral , alleviating poverty and unleashing human
creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that
1. Microfinance helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
3. By supporting womens economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well-being.
4. The level of impact relates to the length of time clients have had access to financial services.
1.1

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are:

1.2

Working group on credit to the poor through SHGs, NGOs, NABARD, 1995

The National Microfinance Taskforce, 1999

Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002

Microfinance Development and Equity Fund, NABARD, 2005

Working group on Financing NBFCs by Banks- RBI

Activities in Microfinance

Microcredit: It is a small amount of money loaned to a client by a bank or other institution.

Microcredit can be offered, often without collateral, to an individual or through group lending.
25

Micro savings: These are deposit services that allow one to save small amounts of money for future
use. Often without minimum balance requirements, these savings accounts allow households to save in
order to meet unexpected expenses and plan for future expenses.
Micro insurance: It is a system by which people, businesses and other organizations make a payment
to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their
businesses while mitigating other risks affecting property, health or the ability to work.
Remittances: These are transfer of funds from people in one place to people in another, usually across
borders to family and friends. Compared with other sources of capital that can fluctuate depending on
the political or economic climate, remittances are a relatively steady source of funds.
1.3

Legal Regulations

Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of
1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the
respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is
no specific law catering to NGOs although they can be registered under the Societies Registration Act,
1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on selfregulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also
borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory
organizations. In January 2000, the RBI essentially created a new legal form for providing
microfinance services for NBFCs registered under the Companies Act so that they are not subject to
any capital or liquidity requirements if they do not go into the deposit taking business. Absence of
liquidity requirements is concern to the safety of the sector.

Development Process through Micro Finance

Donors and Banks

Micro-Finance

Governmentand Banks

Implementing Organisations

Individual

Awareness/Promotional
Work
26

Promotion and Formation of

Individual

Figure 3.1

Micro-finance interventions through different organisations

National
Financial
Institutions

Government Funded
Programmes

Banks

27

Donors/Bilateral
Projects

Figure 3.2

Microfinance in India
At present lending to the economically active poor both rural and urban is pegged at around Rs.7000
crores in the Indian banks credit outstanding. As against this, according to even the most conservative
estimates, the total demand for credit requirements for this part of Indian society is somewhere around
Rs.2,00,000 crores.
28

Microfinance changing the face of poor India

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In
India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme,
aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'.
In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically
weaker sections" have been used to broadly define micro-finance customers. Research across the globe
has shown that, over time, microfinance clients increase their income and assets, increase the number
of years of schooling their children receive, and improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined
delivery of financial services along with technical assistance, and agricultural business development
services. When compared to the wider SHG bank linkage movement in India, private MFIs have had
limited outreach. However, we have seen a recent trend of larger microfinance institutions
transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in
India appears to be positive in terms of the ability of microfinance to attract more funds and therefore
increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:

At the very bottom in terms of income and assets, are those who are landless and engaged in
agricultural work on a seasonal basis, and manual labourers in forestry, mining, household
industries, construction and transport. This segment requires, first and foremost, consumption
credit during those months when they do not get labour work, and for contingencies such as
illness. They also need credit for acquiring small productive assets, such as livestock, using
which they can generate additional income.

The next market segment is small and marginal farmers and rural artisans, weavers and those
self-employed in the urban informal sector as hawkers, vendors, and workers in household
micro-enterprises. This segment mainly needs credit for working capital, a small part of which
also serves consumption needs. This segment also needs term credit for acquiring additional
productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers, and
equipment (looms, machinery) and worksheds in case of non-farm workers.

The third market segment is of small and medium farmers who have gone in for commercial
crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying,
poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and
slums, engaged in processing or manufacturing activity, running provision stores, repair
workshops, tea shops, and various service enterprises. These persons are not always poor,
29

though they live barely above the poverty line and also suffer from inadequate access to formal
credit.
Well these are the people who require money and with Microfinance it is possible. Right now the
problem is that, it is SHGs' which are doing this and efforts should be made so that the big financial
institutions also turn up and start supplying funds to these people. This will lead to a better India and
will definitely fulfill the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty.
One of the statements is really appropriate here, which is as:
Money, says the proverb makes money. When you have got a little, it is often easy to get more. The
great difficulty is to get that little.Adams Smith.
Today India is facing major problem in reducing poverty. About 25 million people in India are under
below poverty line. With low per capita income, heavy population pressure, prevalence of massive
unemployment and underemployment, low rate of capital formation, misdistribution of wealth and
assets , prevalence of low technology and poor economics organization and instability of output of
agriculture production and related sectors have made India one of the poor countries of the world.
Present Scenario of India:
India falls under low income class according to World Bank. It is second populated country in the
world and around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a
result there is chronic underemployment and per capita income is only $ 3262. This is not enough to
provide food to more than one individual. The obvious result is abject poverty, low rate of education,
low sex ratio, exploitation. The major factor account for high incidence of rural poverty is the low
asset base. According to Reserve Bank of India, about 51 % of people house possess only 10% of the
total asset of India .This has resulted low production capacity both in agriculture (which contribute
around 22-25% of GDP) and Manufacturing sector. Rural people have very low access to
institutionalized credit (from commercial bank).
Poverty alleviation programmes and conceptualization of Microfinance:
There has been a continuous effort of planners of India in addressing the poverty. They have come up
with development programmes like Integrated Rural Development progamme (IRDP), National Rural
Employment Programme (NREP), Rural Labour Employment Guarantee Programme (RLEGP) etc.
But these progamme have not been able to create massive impact in poverty alleviation. The
production oriented approach of planning without altering the mode of production could not but result
of the gains of development by owners of instrument of production. The mode of production does
remain same as the owners of the instrument have low access to credit which is the major factor of
production. Thus in Nineties National bank for agriculture and rural development(NABARD) launches
30

pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower
rungs of rural economy. Microfinance the buzzing word of this decade was meant to cure the illness of
rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum.
The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.
Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on
informal financing intermediaries like money lenders, family members, friends etc.
Distribution of Indebted Rural Households: Agency wise
Credit Agency

Percentage of Rural Households

Government

6.1

Cooperative Societies

21.6

Commercial banks and RRBs

33.7

Insurance

0.3

Provident Fund

0.7

Other Institutional Sources

1.6

All Institutional Agencies

64.0

Landlord

4.0

Agricultural Moneylenders

7.0

Professional Moneylenders

10.5

Relatives and Friends

5.5

Others

9.0

All Non Institutional Agencies

36.0

All Agencies

100.0
Table 3.2

Self Help Groups (SHGs)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing
number of poor people (mostly women) in various parts of India are members of SHGs and actively
engage in savings and credit (S/C), as well as in other activities (income generation, natural resources
management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent
element and offers a chance to create some control over capital, albeit in very small amounts. The
SHG system has proven to be very relevant and effective in offering women the possibility to break
gradually away from exploitation and isolation.
How self-help groups work
31

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor,
voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per
the group members' decision".
Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only
youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of
government and non- governmental agencies, they now make up 90% of all SHGs.
The rules and regulations of SHGs vary according to the preferences of the members and those
facilitating their formation. A common characteristic of the groups is that they meet regularly
(typically once per week or once per fortnight) to collect the savings from members, decide to which
member to give a loan, discuss joint activities (such as training, running of a communal business, etc.),
and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a
treasurer, and sometimes other office holders.
Most SHGs start without any external financial capital by saving regular contributions by the
members. These contributions can be very small (e.g. Rs.10 per week). After a period of consistent
savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small
internal loans for micro enterprise activities and consumption. Only those SHGs that have utilized their
own funds well are assisted with external funds through linkages with banks and other financial
intermediaries.
Micro Finance Models
1. Micro Finance Institutions (MFIs):
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the RashtriyaMahilaKosh (RMK), SIDBI Foundation for micro-credit and NABARD
and employ a variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into
financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country,
the number of MFIs is estimated to be around 800.
Legal Forms of MFIs in India
Types of MFIs

Estimated Legal Acts under which Registered

Number*

32

1. Not for Profit MFIs

400 to 500 Societies Registration Act, 1860 or

similar

a.) NGO - MFIs

Acts

Indian Trust Act, 1882

b.) Non-profit Companies

2. Mutual

Provincial

Benefit

10

Section 25 of the Companies Act, 1956

MFIs 200 to 250 Mutually Aided Cooperative Societies

a.) Mutually Aided Cooperative

Act enacted by State Government

Societies (MACS) and similarly

set up institutions
3. For Profit MFIs
a.)

Non-Banking

Indian Companies Act, 1956

Financial

Reserve Bank of India Act, 1934

Companies (NBFCs)
Total

700 800
Table 3.3

2. Bank Partnership Model

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all relationships with the client, from first
contact to final repayment. The model has the potential to significantly increase the amount of
funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access. If the MFI fulfills the true sale
criteria, the exposure of the bank is treated as being to the individual borrower and the prudential
exposure norms do not then inhibit such funding of MFIs by commercial banks through the
securitization structure.
3. Banking Correspondents
The proposal of banking correspondents could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. This regulation evolved at a time when there were
genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people
have confidence could mobilize savings of gullible public and then vanish with them. It remains
to be seen whether the mechanics of such relationships can be worked out in a way that
minimizes the risk of misuse.
33

4. Service Company Model

Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this model
has two very different and interesting operational features:

The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a standalone MFI. In case of banks
which have large branch networks, it also allows rapid scale up. In the partnership model,
MFIs may contract with many banks in an arms length relationship. In the service company
model, the MFI works specifically for the bank and develops an intensive operational
cooperation between them to their mutual advantage.

The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take
the burden of overseeing microfinance operations off the management of the bank and put it
in the hands of MFI managers who are focused on microfinance to introduce additional
products, such as individual loans for SHG graduates, remittances and so on without
disrupting bank operations and provide a more advantageous cost structure for microfinance.

Bank Led Model

The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this
program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and
government agencies.
ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However,
rather than spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced
merger of Bank of Madura (BoM), which had significant presence in the rural areas of South India,
especially Tamil Nadu, with a customer base of 1.9 million and 87 branches. Bank of Madura's SHG
development program was initiated in 1995. Through this program, it had formed, trained and initiated
small groups of women to undertake financial activities like banking, saving and lending. By 2000, it
had created around 1200 SHGs across Tamil Nadu and provided credit to them.

Partnership Models
A model of microfinance has emerged in recent years in which a microfinance institution (MFI)
borrows from banks and on-lends to clients; few MFIs have been able to grow beyond a certain point.
34

Under this model, MFIs are unable to provide risk capital in large quantities, which limits the advances
from banks. In addition, the risk is being entirely borne by the MFI, which limits its risk-taking.
This model aimed at synergizing the comparative advantages and financial strength of the bank with
social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model,
ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit
distribution channels and could take advantage of the expertise of these institutions in rural areas.
Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary
financial support to their activities. Later, ICICI Bank came up with a plan where the NGO/MFI
continued to promote their microfinance schemes, while the bank met the financial requirements of the
borrowers.
TYPES OF ORGANIZATION
These organizations are classified in the following categories to indicate the functional aspects covered
by them within the micro finance framework. The aim, however, is not to "typecast" an organization,
as these have many other activities within their scope:
Microfinance providers in India can be classified under three broad categories: formal, semiformal,
and informal.

Formal Sector
The formal sector comprises of the bankssuch as NABARD, SIDBI and other regional rural
banks (RRBs). They primarily provide credit for assistance in agriculture and micro-enterprise
development and primarily target the poor. Their deposit at around Rs.350 billion and of that,
around Rs.250 billion has been given as advances. They charge an interest of 12-13.5% but if
we include the transaction costs (number of visits to banks, compulsory savings and costs
incurred for payments to animators/staff/local leaders etc.) they come out to be as high as 2124%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal organizations
broadly referred to as MFIs. Registered under a variety of legal acts, these organizations greatly
differ in philosophy, size, and capacity. There are over 500 non-government organizations
(NGOs) registered as societies, public trusts, or non-profit companies. Organizations
implementing micro-finance activities can be categorized into three basic groups.
I.

Organizations which directly lend to specific target groups and are carrying out all
related activities like recovery, monitoring, follow-up etc.
35

II.

Organizations who only promote and provide linkages to SHGs and are not directly
involved in micro lending operations.

III.

Organizations which are dealing with SHGs and plan to start micro-finance related
activities.

Informal Sector
In addition to friends and family, moneylenders, landlords, and traders constitute the informal
sector. While estimates of their importance vary significantly, it is undeniable that they
continue to play a significant role in the financial lives of the poor. These are the organizations
that provide support to implementing organizations. The support may be in terms of resources
or training for capacity building, counseling, networking, etc. They operate at state/regional or
national level. They may or may not be directly involved in micro-finance activities adopted by
the associations/collectives to support implementing Organizations.

Grameen Bank
The Grameen Model which was pioneered by Prof MuhammedYunus of Grameen Bank is perhaps the
most well-known, admired and practiced model in the world. The model involves the following
elements.

Homogeneous affinity group of five

Eight groups form a Centre

Centre meets every week

Regular savings by all members

Loan proposals approved at Centre meeting

Loan disbursed directly to individuals

All loans repaid in 50 installments

The Grameen model follows a fairly regimented routine. It is very cost intensive as it involves building
capacity of the groups and the customers passing a test before the lending could start. The group
members tend to be selected or at least strongly vetted by the bank. One of the reasons for the high
cost is that staff members can conduct only two meetings a day and thus are occupied for only a few
hours, usually early morning or late in the evening. They were used additionally for accounting work,
but that can now be done more cost effectively using computers. The model is also rather meeting
intensive which is fine as long as the members have no alternative use for their time but can be a
problem as members go up the income ladder.

36

The greatness of the Grameen model is in the simplicity of design of products and delivery. The
process of delivery is scalable and the model could be replicated widely. The focus on the poorest,
which is a value attribute of Grameen, has also made the model a favourite among the donor
community.
However, the Grameen model works only under certain assumptions. As all the loans are only for
enterprise promotion, it assumes that all the poor want to be self-employed. The repayment of loans
starts the week after the loan is disbursed the inherent assumption being that the borrowers can
service their loan from the ex-ante income.

SKS Microfinance(CEO-VikramAkula)

Many companies say they protect the interests of their customers. Very few actually sit in dirt with
them, using stones, flowers, sticks, and chalk powder to figure out if they will be able to repay a $20
loan at $1 a month. With this approach, this company has created its own loyal gang of over 2 million
customers.
Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, home based
artisans, and small scale producers, each living on less than $2 a day. It works on a model that would
allow micro-finance institutions to scale up quickly so that they would never have to turn poor person
away.
Its model is based on 3 principles1. Adopt a profit-oriented approach in order to access commercial capital- Starting with the pitch
that there is a high entrepreneurial spirit amongst the poor to raise the funds, SKS converted
itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a
founding investor. Then it secured money from parties such as Unitus, a Seattle based NGO
that helps promote micro-finance; SIDBI; and technology entrepreneur VinodKhosla. Later, it
was able to attract multimillion dollar lines of credit from Citibank, ABN Amro, and others.
2. Standardize products, training, and other processes in order to boost capacity- They collect
standard repayments in round numbers of 25 or 30 rupees. Internally, they have factory style
training models. They enroll about 500 loan officers every month. They participate in theory
classes on Saturdays and practice what they have learned in the field during the week. They
have shortened the training time for a loan officer to 2 months though the average time taken
by other industry players is 4-6 months.
3. Use Technology to reduce costs and limit errors- It could not find the software that suited its
requirements, so it they built their own simple and user friendly applications that a computerilliterate loan officer with a 12th grade education can easily understand. The system is also
37

internet enabled. Given that electricity is unreliable in many areas they have installed car
batteries or gas powered generators as back-ups in many areas.
Scaling up Customer Loyalty
Instead of asking illiterate villagers to describe their seasonal pattern of cash flows, they encourage
them to use colored chalk powder and flowers to map out the village on the ground and tell where the
poorest people lived, what kind of financial products they needed, which areas were lorded over by
which loan sharks, etc. They set peoples tiny weekly repayments as low as $1 per week and health
and whole life insurance premiums to be $10 a year and 25 cents per week respectively. They also
offer interest free emergency loans. The salaries of loan officers are not tied to repayment rates and
they journey on mopeds to borrowers villages and schedule loan meetings as early as 7.00 A.M. Deep
customer loyalty ultimately results in a repayment rate of 99.5%.
Leveraging the SKS brand
Its payoff comes from high volumes. They are growing at 200% annually, adding 50 branches and
1,60,000 new customers a month. They are also using their deep distribution channels for selling soap,
clothes, consumer electronics and other packaged goods.
Marketing of Microfinance Products:1. Contract Farming and Credit Bundling
Banks and financial institutions have been partners in contract farming schemes, set up to
enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be
extended under tie-up arrangements with corporate for production of high quality produce with
stable marketing arrangements provided and only, provided the price setting mechanism for
the farmer is appropriate and fair.
2. Agri Service Centre Rabo India
Rabo India Finance Pvt. Ltd. has established agri-service centres in rural areas in cooperation
with a number of agri-input and farm services companies. The services provided are similar to
those in contract farming, but with additional flexibility and a wider range of products
including inventory finance. Besides providing storage facilities, each centre rents out farm
machinery, provides agricultural inputs and information to farmers, arranges credit, sells other
services and provides a forum for farmers to market their products.
3. Non Traditional Markets
Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy
Development Board (NDDB) has established auction markets for horticulture producers in
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Bangalore. The operations and maintenance of the market is done by NDDB. The project, with
an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower
members for wholesale marketing. Their produce is planned with production and supply
assurance and provides both growers and buyers a common platform to negotiate better rates.
4. ApniMandi
Another innovation is that of The Punjab Mandi Board, which has experimented with a
farmers market to provide small farmers located in proximity to urban areas, direct access to
consumers by elimination of middlemen. This experiment known as "ApniMandi" belongs to
both farmers and consumers, who mutually help each other. Under this arrangement a sum of
Rs.5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a
subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm
level, extension services of different agencies are pooled in. These include inputs subsidies,
better quality seeds and loans from Banks. ApniMandi scheme provides self-employment to
producers and has eliminated social inhibitions among them regarding the retail sale of their
produce.
Commercial banksas Microfinance Vehicles
Commercial banks recently have stepped into the realm of microfinance. They have taken tentative but
very important steps toward distributing Microfinance loans to the poor. One advantage of these
institutions is that they bring in the risks management practices that they regularly use in their
commercial operations risk management practices that they regularly use in their commercial
operations. The other important aspect they bring in is the professional credit appraisal practices that
are used in their normal operations. These important features combined with a mission to provide the
poor entrepreneurs will enhance the social lives and they can run their business effectively with proper
access to credit. In some cases, successful microfinance NGOs have transformed themselves into for
profit commercial banks (BancoSol of Bolivia is a prime example of a microfinance NGO that has
successfully transformed itself into a for-profit commercial bank). This transformation from a not-forprofit institution into for-profit organization has increased the focus of these organizations on financial
self-sufficiency. This transformation has been possible because commercial banks have entered this
arena bringing in key concepts like self-sufficiency, proper credit appraisal and risk management
practices. But there are some issues that have to be dealt with by the banks before embarking on the
Microfinance journey.
They are:
1. Banks Outreach
2. Clarity in objectives

39

Banks outreach is one of the most crucial aspects that must be critically examined by them before
entering into microfinance sector. One reason for it is that most of the commercial banks have little or
no rural presence with rate exceptions such as India, where rural banking was a priority and there is a
significant presence of commercial banks in the rural areas. They have to decide whether to start their
own branches in rural areas if they do not have any or partner with other banks or other microfinance
institutions in order to get a foothold in the rural finance sector. The other issue that has to be resolved
is the clarity in the bank in dealing with its microfinance operations. They have to decide whether it
will be completely independent operation or it will be part of their existing rural banking framework.
For example, ICICI banks microfinance operation is a completely independent operation and it does
not have any link with its commercial banking operation. Once these major issues are sorted out
commercial banks will have enough leverage to approach the microfinance sector with confidence.

MICROFINANCE INSTITUTIONS

Microfinance institutions are perhaps one of the most important vehicles to reach the rural poor. These
institutions can act as very important tool to provide the rural entrepreneurs with micro-loans, which
will help them to start their own businesses and sustain them. One advantage that these institutions
have over other financial services delivery vehicles is the focus. While NGOs have to straddle with
various non-financial and financial services activities and commercial bank with other operations.
MFIs can solely focus on providing the financial service to the poor since the very objective of starting
this kind of institution is to provide financial services in the rural areas. There are many examples of
MFIs that has done some stellar work in this area such as ACCION International, BancoSol and
Grameen Bank. These institutions have helped many people in enhancing their lives and achieving a
decent social status in the societies that they are living in. The key advantages that they have over the
other forms of microfinance are:

Focus is solely on providing financial services.

It can provide whole gamut of services from loans to insurance.

However, it has also some advantages like sustainability of these institutions. Most of the MFIs
including Grameen bank are still donor supported organization and many of them still depend on
outside funds for their survival. Only some have like BancoSol have made successful transition from
donor supported financially self-sustained organization.
Apart from these there are several other important mechanisms through while microfinance is provided
like mutual community groups, regional woman group like Development of Women and Child in
Rural Area (DWCRA) and other local organizations. However, they have not played a significant role

40

in the microfinance movement till now and they can play a major role in providing rural financial
services in the long run.

ICICI Bank launches new initiative in micro-finance

ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and
Operations Private Ltd (FINO), which was launched on Thursday, July 13, 2001.

FINO would provide technological solutions as well as services to finance providers to reach
the underserved in the country. ICICI Bank is the lead facilitator.

According to Mr. NachiketMor, Deputy Managing Director, ICICI Bank, FINO is an

independent entity. "We would reduce our stake in the company when required," he said.

ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007, he said,
speaking on the sidelines of the press conference to launch FINO. At present, the bank has tieups with 100 MFIs.

FINO is an initiative in the micro-finance sector. It would target 300-400 million people who
do not have access to basic financial services, said Mr. Manish Khera, CEO, FINO. The
company has an authorized capital of Rs.50 crore. MFIs, NBFCs, RRBs, co-operative banks,
etc. would directly or indirectly tie up with FINO to use its services, he said. FINO would
charge Rs.25-30 per account every year.

Core banking products

FINO has partnered with IBM and i-flex to offer core banking products. It would also provide credit
bureau services, which includes individual customer credit rating and analytics based on transaction
history. It also launched biometric cards for customers, which would be a proof of identity and give
collateral to them. The card would also offer multiple products including savings, loans, insurance,
recurring deposits, fixed deposits and remittances. The company would also build-up customer
database, thus bringing them into mainstream banking.
"There was a need for automated structured data system like FINO," said Mr. Mor. "Essential pieces of
infrastructure are missing in India. We lack credit-tracking mechanism; therefore there was a need for
an intervention like FINO."
The company expects to reach 25 million customers in five years and two million customers by the
end of 2007.
FINO aims bringing scale to "micro" business leading to lowering of costs for the local financial
institutions (LFIs) and act as an internal technology department for the LFIs, said Mr. Khera.

41

The company is working on providing technological solutions in insurance, especially the health
insurance sector to the under-privileged," he said. It is interacting with Nabard, SIDBI and other banks
to give shape to what FINO does, said Mr. Khera.

ICICI Bank's thrust on micro-finance

CHENNAI, MARCH 9.

ICICI Bank has entered into partnerships with various microfinance

institutions (MFI) and non-Government organizations (NGOs) to scale up its micro lending business.
Addressing presspersons here, today, NachiketMor, Executive Director, ICICI Bank, said, the
partnership model would provide assured source of funding to NGOs and MFIs. The bank had
extended advances to the tune of Rs.150 crores as on February 29, this year, under this scheme, Mr.
Mor said.
The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of
Madura after its merger with ICICI Bank. Since then the SHG programme had grown substantially and
10,175 groups had been promoted reaching out to 2.03 lakh women spread across 2,398 villages, the
Executive Director said.
One of the micro finance institutions, `Microcredit Foundation of India', established by K. M.
Thiagarajan, former Chairman of Bank of Madura in 2002, had initiated a programme for microcredit
through self-help groups.
ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to
outsource SHG development, maintenance of groups, credit linkage and recovery of loans.

Financial Institutions and banks

Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of
low costs of operation. Institutions like SIDBI and NABARD are hard-nosed bankers and would not
work with the idea if they did not see a long term engagement which only comes out of sustainability
(that is economic attractiveness).
On the supply side, it is also true that it has all the trappings of a business enterprise, its output is
tangible and it is easily understood by the mainstream. This also seems to sound nice to the
government, which in the post liberalization era is trying to explain the logic of every rupee spent.
That is the reason why microfinance has attracted mainstream institutions like no other developmental
project.
Perhaps the most important factor that got banks involved is what one might call the policy push.Given
that most of our banks are in the public sector, public policy does have some influence on what they
will or will not do. In this case, policy was followed by diligent, if meandering, promotional work by
42

NABARD. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially
followed by a seven-page memo by NABARD to all bank chairmen, and later by sensitization and
training programmes for bank staff across the country. Several hundred such programmes were
conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy
push was sweetened by the NABARD refinance scheme that offers much more favorable terms (100%
refinance, wider spread) than for other rural lending by banks. NABARD also did some system setting
work and banks lately have been given targets. The canvassing, training, refinance and close follow up
by NABARD has resulted in widespread bank involvement.
Moreover, for banks the operating cost of microfinance is perhaps much less than for pure MFIs. The
banks already have a vast network of branches. To the extent that an NGO has already promoted SHGs
and the SHG portfolio is performing better than the rest of the rural (if not the entire) portfolio,
microfinance via SHGs in the worst case would represent marginal addition to cost and would often
reduce marginal cost through better capacity utilization. In the process the bank also earns brownie
points with policy makers and meets its priority sector targets.
It does not take much analysis to figure out that the market for financial services for the 50-60 million
poor households of India, coupled with about the same number who are technically above the poverty
line but are severely under-served by the financial sector, is a very large one. Moreover, as in any
emerging market, though the perceived risks are higher, the spreads are much greater. The traditional
commercial markets of corporates, business, trade, and now even housing and consumer finance are
being sought by all the banks, leading to price competition and wafer thin spreads.
Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for
deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering all
these services now through their group companies, it becomes imperative for them to expand their
distribution channels as far and deep as possible, in the hope of capturing the entire financial services
business of a household.
Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer goods
(FMCG) companies such as Hindustan Levers, and consumer durable companies such as Philips have
realized the potential of this big market and are actively using SHGs as entry points. Some amount of
free-riding is taking place here by companies, for they are using channels which were built at a
significant cost to NGOs, funding agencies and/or the government.
On the whole, the economic attractiveness of microfinance as a business is getting established and this
is a sure step towards mainstreaming. We know that mainstreaming is a mixed blessing, and one tends
to exchange scale at the cost of objectives. So it needs to be watched carefully.
The RBI will now directly regulate microfinance sector

43

The Reserve Bank of India has now decided to bunch together the beleaguered microfinance sector as
a niche segment within the category of non-banking financial companies (NBFC).
This means it will now be the direct regulator of this sector in line with the recommendations of the
Malegam Committee which made recommendations in this regard after the Andhra microfinance
fiasco.
Under guidelines issued on Friday, the RBI has directed all existing microfinance institutions (MFIs)
who can meet its new regulatory norms to register as NBFC-MFIs by April 2012. Those who do not
meet the norms cannot, henceforth, lend more than 10 percent of their total assets to the sector.
The conditions set for NBFC-MFIs include the following:

They must have minimum net owned funds of Rs.5 crore (Rs.2 crore if they operate in the
North-East).

Their capital adequacy ratio (CAR) has to be 15 percent. This ratio is the measure of a banks
capital weighed against its risk assets (loans). Since MFIs in Andhra are stuck up to their necks
in bad debts, the RBI has given them a one-year concession in capital adequacy. MFIs with
more than 25 percent exposure to Andhra Pradesh need to maintain only 12 percent CAR in the
first year.

MFIs cannot lend at more than 26 percent interest, and margins on borrowed funds cannot
exceed 12 percent. This means if MFIs can borrow cheap say at 10 percent the interest rate
cap on lending is 22 percent, and not 26 percent.

As far as lending is concerned, not more than two MFIs can lend to the same borrower while
one borrower cannot be a member of two groups simultaneously. The frequency of repayment
installments can be decided by the borrower.

MFIs should have higher cutoffs for lending in urban and semi-urban areas.

MFIs have to start provisioning for defaults, and loans that are not serviced for more than 90
days should be classified as non-performing.

The Reserve Bank has had to step in because states were beginning to impose their own regulations.
This is what happened in Andhra Pradesh, where the state issued an ordinance last October when
reports of borrower suicides and unfair debt collection methods were reported. The MFI boom
collapsed immediately after the Andhra law was imposed.
In its recent report on Trend and Progress of the Banking in India, 2011-12, the RBI had expressed
concern over states bringing in their own regulations. This was queering the pitch for big MFIs with
business across several states since they would have to follow different laws in different states.
The collapse of MFIs in Andhra Pradesh also sent a clear warning signal those MFIs needed a single
regulatory environment especially since micro financing is seen as one way of improving financial
inclusion.
44

The National Bank for Agriculture and Rural Development (Nabard) was one of the choices for
regulating MFIs, but since it has its own lending exposures to rural areas, the mantle finally fell on the
RBI itself.
The MFI industry is likely to welcome the new norms, barring the one capping interest rates. In the
current high interest rate scenario and high default rates, the 26 percent limit will squeeze their
margins.

MICROFINANCE AND WOMEN EMPOWERMENT

Women as micro and small entrepreneurs have increasingly become the key target group for micro
finance programs. Consequently, providing access to micro finance facilities is not only considered a
pre-condition for poverty alleviation, but also considered as a strategy for empowering women. In
developing countries like INDIA micro finance is playing an important role, promoting gender
equality and is helping in empowering women so that they can live quality life with dignity.
The study conducted by FINCA Client Poverty Assessment conducted in 2003 revealed that of the
interviewed clients 81 percent were women, and it was found that food security was 15 percent higher
among their village banking clients than non-clients. The report also showed clients to have 11 percent
more of their children enrolled in school with an 18 percent increase in healthcare benefits. Clients
housing security was reported as 18 percent higher than non-clients. The assessment concluded that
microfinance improved the wellbeing of women clients and their families.
Microfinance has a positive effect on the empowerment of women by creating an empowerment
indicator.
These indicators can be based on the following factors:

Mobility.

Economic security- enables poor women in making them economic agents of change by
increasing their income and productivity.

Ability to make small purchases.

Ability to make larger purchases.

Involvement in major household decisions.

Relative freedom from domination within the family.

Political and legal awareness.

Involvement in political campaigning and protests.

To access to markets and information.

They become more confident.

They get a better control of the resources.

45

They can confront systemic gender inequalities

BEIJING CONFERENCE 1995 HAD IDENTIFIED CERTAIN INDICATORS OF WOMEN

EMPOWERMENT

Important among them are as follows:

Increase in self-esteem, individual and collective confidence

Increase in articulation, knowledge and awareness on health, nutrition reproductive rights, law
and literacy

Increase an decrease in personal leisure time and time for child care;

Increase on decrease of workloads in new programmes

Change in roles and responsibility in family & community.

Visible increase on decrease in violence on women and girls;

Responses to, changes in social customs like child marriage, dowry, discrimination against
widows

Visible changes in women's participation level attending meeting, participating and demanding
participation

Increase in bargaining and negotiating power at home, in community and the collective

Increase access to and ability to gather information

Formation of women collectives

Positive changes in social attitudes

Awareness and recognition of women's economic contribution within and outside the
household;

Womens decision-making over her work and income

WOMENS EMPOWERMENT AND MICRO FINANCE: DIFFERENT PARADIGMS

Concern with womens access to credit and assumptions about contributions to womens
empowerment are not new. From the early 1970s womens movements in a number of countries
became increasingly interested in the degree to which women were able to access poverty-focused
credit programmes and credit cooperatives. In India organizations like Self- Employed Womens
Association (SEWA) among others with origins and affiliations in the Indian labour and womens
movements identified credit as a major constraint in their work with informal sector women workers.

a) Feminist Empowerment Paradigm

The feminist empowerment paradigm did not originate as a Northern imposition, but is firmly rooted
in the development of some of the earliest micro-finance programmes in the South, including SEWA
46

in India. It currently underlies the gender policies of many NGOs and the perspectives of some of the
consultants and researchers looking at gender impact of micro-finance programmes (e.g. Chen 1996,
Johnson, 1997).
Here the underlying concerns are gender equality6 and womens human rights. Womens
empowerment is seen as an integral and inseparable part of a wider process of social transformation.
The main target group is poor women and women capable of providing alternative female role models
for change. Increasing attention has also been paid to men's role in challenging gender inequality.
Micro-finance is promoted as an entry point in the context of a wider strategy for womens economic
and socio-political empowerment which focuses on gender awareness and feminist organization. As
developed by Chen in her proposals for a sub sector approach to micro credit, based partly on SEWA's
strategy and promoted by UNIFEM, microfinance must be:
Part of a sectorial strategy for change which identifies opportunities, constraints and bottlenecks within
industries which if addressed can raise returns and prospects for large numbers of women. Possible
strategies include linking women to existing services and infrastructure, developing new technology
such as labour-saving food processing, building information networks, and shifting to new markets,
policy level changes to overcome legislative barriers and unionization.
Based on participatory principles to build up incremental knowledge of industries and enable women
to develop their strategies for change (Chen, 1996). Economic empowerment is however defined in
more than individualist terms to include issues such as property rights, changes intra-household
relations and transformation of the macro-economic context. Many organizations go further than
interventions at the industry level to include gender-specific strategies for social and political
empowerment. Some programmes have developed very effective means for integrating gender
awareness into programmes and for organizing women and men to challenge and change gender
discrimination. Some also have legal rights support for women and engage in gender advocacy. These
interventions to increase social and political empowerment are seen as essential prerequisites for
economic empowerment.

b) Poverty Reduction Paradigm

The poverty alleviation paradigm underlies many NGO integrated poverty-targeted community
development programmes. Poverty alleviation here is defined in broader terms than market incomes to
encompass increasing capacities and choices and decreasing the vulnerability of poor people.
The main focus of programmes as a whole is on developing sustainable livelihoods, community
development and social service provision like literacy, healthcare and infrastructure development.
There is not only a concern with reaching the poor, but also the poorest. Although term 'empowerment'
is frequently used in general terms, often synonymous with a multi-dimensional definition of poverty

47

alleviation, the term 'women's empowerment is often considered best avoided as being too
controversial and political.

c) Financial Sustainability Paradigm

The financial self-sustainability paradigm (also referred to as the financial systems approach or
sustainability approach) underlies the models of microfinance promoted since the mid-1990s by most
donor agencies and the Best Practice guidelines promoted in publications by USAID, World Bank,
UNDP and CGAP.
The ultimate aim is large programmes which are profitable and fully self-supporting in competition
with other private sector banking institutions and able to raise funds from international financial
markets rather than relying on funds from development agencies. The main target group, despite
claims to reach the poorest, is the bankable poor': small entrepreneurs and farmers. This emphasis on
financial sustainability is seen as necessary to create institutions which reach significant numbers of
poor people in the context of declining aid budgets and opposition to welfare and redistribution in
macro-economic policy.
These paradigms do not correspond systematically to any one organizational model of micro-finance.
Micro-finance providers with the same organizational form e.g. village bank, Grameen model or
cooperative model may have very different gender policies and/or emphases and strategies for poverty
alleviation. The three paradigms represent different discourses each with its own relatively consistent
internal logic in relating aims to policies, based on different underlying understandings of
development. They are not only different, but often seen as incompatible discourses in uneasy
tension and with continually contested degrees of dominance. In many programmes and donor
agencies there is considerable disagreement, lack of communication and/or personal animosity and
promoted by different stakeholders within organizations between staff involved in micro-finance
(generally firm followers of financial self-sustainability), staff concerned with human development
(generally with more sympathy for the poverty alleviation paradigm and emphasizing participation and
integrated development) gender lobbies (generally incorporating at least some elements of the feminist
empowerment paradigm). What is of concern in current debates is the way in which the use of
apparently similar terminology of empowerment, participation and sustainability conceals radical
differences in policy priorities. Although womens empowerment may be a stated aim in the rhetoric
of official gender policy and program promotion, in practice it becomes subsumed in and marginalized
by concerns of financial sustainability and/or poverty alleviation.

Micro Credit and Women's Empowerment

48

Before 1990's, credit schemes for rural women were almost negligible. The concept of women's credit
was born on the insistence by women oriented studies that highlighted the discrimination and struggle
of women in having access to credit. However, there is a perceptible gap in financing genuine credit
needs of the poor especially women in the rural sector.
There are certain misconceptions about the poor people that they need loan at subsidized rates of
interest on soft terms, they lack education, skills, capacity to save, credit-worthiness and therefore are
not bankable. Nevertheless, the experiences of several SHGs(self-help groups) reveal that rural poor
are actually efficient managers of credit and finance. Availability of timely and adequate credit is
essential for them to undertake any economic activity rather than credit subsidy.
The Government measures have attempted to help the poor by implementing different poverty
alleviation programmes but with little success. Since most of them are target-based involving lengthy
procedures for loan disbursements, high transaction costs, and lack of supervision and monitoring.
Banks often suffer from poor repayment leading to a high level of non-performing assets NPAs (nonperforming assets).
Since the credit requirements of the rural poor cannot be adopted on project lending approach as it is in
the case of organized sector, there emerged the need for an informal credit supply through SHGS. The
rural poor with the assistance from NGOs have demonstrated their potential for self-help to secure
economic and financial strength. Various case studies show that there is a positive correlation between
credit availability and women's empowerment.
Microfinance refers to the provision of financial services to low-income clients, including consumers
and the self-employed. Microfinance programmes are currently being promoted as a key strategy for
simultaneously addressing both poverty alleviation and women's empowerment. Where financial
service provision leads to the setting up or expansion of microenterprises there are a range of potential
impacts including:

Increasing women's income levels and control over income leading to greater levels of
economic independence

Access to networks and markets giving wider experience of the world outside the home, access
to information and possibilities for development of other social and political roles.

Enhancing perceptions of women's contribution to household income and family welfare,

increasing women's participation in household decisions about expenditure and other issues and
leading to greater expenditure on women's welfare.

The term micro finance is of recent origin and is commonly used in addressing issues related to
poverty alleviation, financial support to micro entrepreneurs, gender development etc. There is,
however, no statutory definition of micro finance. The taskforce on supportative policy and Regulatory
Framework for Microfinance has defined microfinance as Provision of thrift, credit and other
49

financial services and products of very small amounts to the poor in rural, semi-urban or urban areas
for enabling them to raise their income levels and improve living standards. The term Micro
literally means small. But the task force has not defined any amount. However as per Micro Credit
Special Cell of the Reserve Bank Of India , the borrowal amounts up to the limit of Rs.25000/- could
be considered as micro credit products and this amount could be gradually increased up to Rs.40000/over a period of time which roughly equals to $500 a standard for South Asia as per international
perceptions. The term micro finance sometimes is used interchangeably with the term micro credit.
However while micro credit refers to purveyance of loans in small quantities, the term microfinance
has a broader meaning covering in its ambit other financial services like saving, insurance etc. as well.
The mantra Microfinance is banking through groups. The essential features of the approach are to
provide financial services through the groups of individuals, formed either in joint liability or coobligation mode.
The other dimensions of the microfinance approach are:

Savings/Thrift precedes credit

Credit is linked with savings/thrift

Absence of subsidies

Group plays an important role in credit appraisal, monitoring and recovery.

EMPOWERMENT: FOCUS ON POOR WOMEN

Women have been the vulnerable section of society and constitute a sizeable segment of the povertystruck population. Women face gender specific barriers to access education health, employment etc.
Micro finance deals with women below the poverty line. Micro loans are available solely and entirely
to this target group of women. There are several reason for this: Among the poor , the poor women are
most disadvantaged they are characterized by lack of education and access of resources, both of
which is required to help them work their way out of poverty and for upward economic and social
mobility. The problem is more acute for women in countries like India, despite the fact that womens
labor makes a critical contribution to the economy. This is due to the low social status and lack of
access to key resources. Evidence shows that groups of women are better customers than men, the
better managers of resources. If loans are routed through women benefits of loans are spread wider
among the household. Since womens empowerment is the key to socio economic development of the
community; bringing women into the mainstream of national development has been a major concern of
government. The ministry of rural development has special components for women in its programmes.
Funds are earmarked as Womens component to ensure flow of adequate resources for the same.
Besides SwarnagayantiGrameenSwarazgarYojona (SGSY), Ministry of Rural Development is
implementing other scheme having womens component .They are the Indira AwasYojona (IAJ),
50

National Social Assistance Programme (NSAP), Restructured Rural Sanitation Programme,

Accelerated Rural Water Supply programme (ARWSP) the (erstwhile) Integrated Rural Development
Programme (IRDP), the (erstwhile) Development of Women and Children in Rural Areas (DWCRA)
and the JowaharRozgarYojana (JRY).
MICRO FINANCE INSTRUMENT FOR WOMENS EMPOWERMENT

Micro Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In
India, micro finance scene is dominated by Self Help Groups (SHGs) Bank Linkage Programme,
aimed at providing a cost effective mechanism for providing financial services to the unreached
poor. Based on the philosophy of peer pressure and group savings as collateral substitute , the SHG
programme has been successful in not only in meeting peculiar needs of the rural poor, but also in
strengthening collective self-help capacities of the poor at the local level, leading to their
empowerment. Micro Finance for the poor and women has received extensive recognition as a strategy
for poverty reduction and for economic empowerment. Increasingly in the last five years , there is
questioning of whether micro credit is most effective approach to economic empowerment of poorest
and, among them, women in particular. Development practitioners in India and developing countries
often argue that the exaggerated focus on micro finance as a solution for the poor has led to neglect by
the state and public institutions in addressing employment and livelihood needs of the poor. Credit for
empowerment is about organizing people, particularly around credit and building capacities to manage
money. The focus is on getting the poor to mobilize their own funds, building their capacities and
empowering them to leverage external credit. Perception women is that learning to manage money and
rotate funds builds womens capacities and confidence to intervene in local governance beyond the
limited goals of ensuring access to credit. Further, it combines the goals of financial sustainability with
that of creating community owned institutions.
Before 1990s, credit schemes for rural women were almost negligible. The concept of womens credit
was born on the insistence by women oriented studies that highlighted the discrimination and struggle
of women in having the access of credit. However, there is a perceptible gap in financing genuine
credit needs of the poor especially women in the rural sector. There are certain misconception about
the poor people that they need loan at subsidized rate of interest on soft terms, they lack education,
skill, capacity to save, credit worthiness and therefore are not bankable. Nevertheless, the experience
of several SHGs reveals that rural poor are actually efficient managers of credit and finance.
Availability of timely and adequate credit is essential for them to undertake any economic activity
rather than credit subsidy. The Government measures have attempted to help the poor by
implementing different poverty alleviation programmes but with little success. Since most of them are
target based involving lengthy procedures for loan disbursement, high transaction costs, and lack of
51

supervision and monitoring. Since the credit requirements of the rural poor cannot be adopted on
project lending app roach as it is in the case of organized sector, there emerged the need for an
informal credit supply through SHGs. The rural poor with the assistance from NGOs have
demonstrated their potential for self-help to secure economic and financial strength. Various case
studies show that there is a positive correlation between credit availability and womens empowerment

A real life Examples:Lakshmi, a 22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead of getting
married and starting a family like any other village girl of her age in India, she wanted to set up on her
own business. Lakshmi started an Internet kiosk in her village, offering services like e-mail, Internet
chat and tips on health and education. The kiosk was partially financed by ICICI Bank and was set up
in association with n-Logue Communications. Latha, a 29-year-old married woman with three children
borrowed Rs.18000 to set up a small provision store in Kothaipalli, a small village, in the north of
Andhra Pradesh. Within a year, she started earning Rs.3500 a month from the store. With this money,
she was able to provide her children a good education at a local private school. She was a part of a self
help group in Andhra Pradesh which received financial assistance from ICICI Bank. These are real-life
examples to illustrate how the micro-lending initiatives of ICICI Bank affected the lives of poor
women in India.

52

CHAPTER 4
OBJECTIVES AND RESEARCH
METHODOLOGY

INTRODUCTION
53

This chapter focuses on the methodology & the techniques used for the collection, classification &
tabulation of data. It light on the research problem, the objective of study & its limitaions.
OBJECTIVES OF THE STUDY:

To study the impact of micro finance in empowering the social economic status of women and
developing of social entrepreneurship.

To know about relationship between SHGs members, micro finance banks and entrepreneurs
women.

To clarify the limitation of microfinance programmes as the tool for womens empowerment
and the type of support service necessary to maximize the contribution of microfinance service.

To study potential hurdles in the development of women entrepreneurship.

RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the problem. It is a game plan for conducting
research. In this we describe various steps that are taken by the researcher.
All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry and
inquiry leads to invention.
Research in a common parlance is a search for knowledge. Research is an art of scientific and
systematic investigation. Thus research comprises defining and redefining problems, formulating
hypothesis or suggested solutions; collecting, organizing and evaluating data, making deductions and
reaching conclusions. Research methodology is the arrangement of condition for collection and
analysis of data in a manner that aims to combine relevance to the research purpose with economy in
procedure. Research Methodology is the conceptual structure within which research is conducted. It
constitutes the blueprint for the collection measurement and analysis of the data.
Research methodology is a framework for the study and is used as a guide in collecting and analyzing
the data. It is a strategy specifying which approach will be used for gathering and analyzing the data. it
also includes time and cost budget since most studies are done under these two constraints. The
research methodology includes overall research design, the sampling procedure, the data collection
method and analysis procedure.

TYPE OF RESEARCH USED:54

Descriptive Research
In the study descriptive research design has been used. As descriptive research design is the
description of state of affairs, as it exists at present. In this type of research the researcher has no
control over the variables; he can only report what has happened or what is happening
Descriptive research designs are those design which are concerned with describing the characteristics
of particular individual or of the group. In descriptive and diagnostic study the researcher must be able
to define clearly what he wants to measure and must find adequate method for measuring it.
METHOD OF DATA COLLECTION
After the research problem has been identified and selected the next step is to gather the requisite data.
While deciding about the method of data collection to be used for the researcher should keep in mind
two types of data i.e. primary and secondary.

TYPES OF DATA

PRIMARY
DATA

SECONDRY
DATA

Figure 4.1
Primary Data
The primary data are those, which are collected afresh and for the first time, and thus happened to be
original in character. We can obtain primary data either through observation or through direct
communication with respondent in one form or another or through personal interview.

55DATA
PRIMARY

Figure 4.2
Secondary Data
The secondary data on the other hand, are those which have already been collected by someone else
and which have already been passed through the statistical processes. When the researcher utilizes
secondary data then he has to look into various sources from where he can obtain them. For e.g. books,
magazine, newspaper, internet, publications and reports.
In this study data have been taken fromvarious secondary sources like:

Internet

Books

Magazines

Newspapers

Journals

56

CHAPTER 5
ANALYSIS AND
INTERPRETATION OF DATA

57

Objective 1:-To study the impact of micro finance in empowering the social economic status of
women and developing of social entrepreneurship.
AmountInCrore/No. in Lakhs
Particular

Year

SHG
Savingswith
banks as on
31st March
Loan
disbursed to
SHGs
during the
year
Loan
outstanding
against
SHGs as on
31st March

Total SHGs

All Women SHGs

% ofWomanGroups

No.

Amount

No.

Amount

No.

Amount

2009-10

69.53

6198.71

53.10

4498.66

76.4

72.6

2010-11

74.62

7016.30

60.98

5298.65

81.7

75.5

2009-10

15.87

14453.3

12.94

12429.37

81.6

86

2010-11

11.96

14547.73

10.17

12622.33

85

86.8

2009-10

48.51

28038.28

38.98

23030.36

80.30

82.1

2010-11

47.87

31221.17

39.84

26123.75

83.2

83.7

Table 5.1
Total No. of Loan disbursed:Particular

2009-10

2010-11

Total SHGs

15.87

11.96

All Women SHGs

12.94

10.17

Table 5.2
18
16
14
12
10

2009-10

2010-11

6
4
2
0
Total SHGs

All Women SHGs

Figure 5.1
Total Amount of loan disbursed:58

Particular

2009-10

2010-11

Total SHGs

6198.71

7016.30

All Women SHGs

4498.66

5298.65
Table 5.3

8000
7000
6000
5000
2009-10

4000

2010-11
3000
2000
1000
0
Total SHGs

All Women SHGs

Figure 5.2
INTERPRETATION: - According to main objective to know the economic and social development
of women entrepreneurship. Above table show the economic development of women. In 2009-10loans
disbursed amount to women is 12429.37crore and 2010-11 is 12622.33crore. In 2009-10 SHG Savings
amount to women is 4498.66crore and 2010-11 is 5298.65crore and in 2009-10 loan outstanding
amounts to women is 23030.36crore and 2010-11 is 26123.75crore. That shows the economic
development of women.

Objective 2:-To know about relationship between SHGs members, micro finance banks and
entrepreneurs women.
59

Savings of SHGs with public sector commercial banks as on 31st March 2011
Amount Rs. Lakh

Sr.

Details of SHGs Saving linked

with Banks

Out Of Total SHGs- Exclusive

Women SHGs

No. Of
SHGs

No. of
Members

Saving
Amount

No. Of
SHGs

No. of
Members

Saving
Amount

Name of The Bank

No.

Delhi
1

Allahabad Bank

30

320

14.00

30

320

14.00

Bank of Baroda

383

3775

62.83

377

3685

60.96

Bank of India

35

552

6.73

35

552

6.73

Indian Bank

815

8956

43.59

789

8675

38.39

Central Bank of India

80

0.30

80

0.30

Syndicate Bank

19

173

2.58

16

165

2.54

Punjab National Bank

760

7600

108.42

705

7050

103.99

State Bank of India

751

9012

31.00

751

9012

31.00

Table 5.4

Amount Rs. Lakh

60

Sr.

Name of The Bank

No.

Details of SHGs Saving linked

with Banks

Out Of Total SHGs- Exclusive

Women SHGs

No. Of
SHGs

No. of
Members

Saving
Amount

No. Of
SHGs

No. of
Members

Saving
Amount

Punjab
1

Allahabad Bank

304

3040

9.40

95

950

2.94

Bank of Baroda

150

1200

50.30

142

710

24.50

Bank of India

374

4452

25.43

271

3253

18.76

Canara Bank

159

1936

9.53

137

1502

7.28

Central Bank of India

540

6022

64.42

354

4106

42.06

Punjab & Sind Bank

1113

11744

50.89

745

7911

31.08

Punjab National Bank

4315

46575

2041.77

2105

22073

183.38

State Bank of India

3944

47328

89.00

3156

37872

71.00

Table 5.5

Amount Rs. Lakh

61

Details of SHGs Saving linked

with Banks

Sr.

Out Of Total SHGs- Exclusive

Women SHGs

Name of The Bank

No.

No. Of
SHGs

No. of
Members

Saving
Amount

No. Of
SHGs

No. of
Members

SavingAmount

Haryana
1

Bank of Baroda

152

725

16.00

129

350

2.60

Bank of India

139

1398

42.15

31

290

2.20

Canara Bank

453

4925

52.25

390

4052

37.59

Central Bank of
India

482

5296

28.72

350

3844

19.14

Indian Bank

114

1710

3.63

114

1710

3.63

Punjab & Sind

Bank

704

7040

49.76

411

4110

28.57

Punjab National
Bank

10703

109260

7002.82

8037

84148

4264.17

State Bank of India

4984

59808

207.00

4190

50280

170.00

Table 5.6

62

Amount Rs. Lakh

Sr.

Details of SHGs Saving linked

with Banks

Out of Total SHGs- Exclusive

Women SHGs

No. of
SHGs

No. of
Members

Saving
Amount

No. Of
SHGs

No. of
Members

Saving
Amount

Name of The Bank

No.

Himachal Pradesh
1

Bank of India

46

465

11.50

0.00

Canara Bank

118

1440

4.65

118

1440

4.65

Central Bank of India

412

4244

48.21

324

3382

33.68

Indian Bank

39

585

2.37

39

585

2.37

Punjab & Sind Bank

92

920

11.62

53

530

6.73

Punjab National Bank

18049

182407

1127.80

12301

123010

946.24

State Bank of India

6794

81528

126.00

5436

65232

100.00

UCO Bank

993

11432

333.19

760

8680

259.91

Table 5.7
INTERPRETATION:-There are four states which show the relationship between Banks SHGs and
women SHGs. According to above table it show the total saving of women SHGs with total SHGs and
total saving of SHGs with banks. There are more % of women SHGs saving out of total SHGs saving.
In Delhi region 2010-11 highest SHG Savings amount to women in Punjab national bank is 103.99
lakh and lowest in Central Bank of India is 0.30 lakh. In Punjab region 2010-11 highest SHG Savings
amount to women in Punjab National Bank is 183.38 lakh and Lowest in Allahabad Bank is 2.94
lakh.In Haryana region 2010-11 highest SHG Savings amount to women in Punjab National Bank is
4264.17 lakh and Lowest in Bank of India is 2.20 lakh. In Himachal Pradesh region 2010-11 highest
SHG Savings amount to women in Punjab National Bank is 946.24 lakh and Lowest in Bank of India
is 0.00 Lakh. It shows the good relationship of women SHGs with SHGs group and banks.

63

Objective 3:- To clarify the limitation of microfinance programmes as the tool for womens
empowerment and the type of support service necessary to maximize the contribution of microfinance
service.

Figure 5.3
CHALLENGES FACED BY THE WOMEN ENTREPRENEURS
Challenges are faced by the women entrepreneurs due to many reasons. Some of the challenges faced
by the women entrepreneurs include

Intense competition from similar products, limited knowledge, production and quality
standards as well as low confidence and morale.

Many women started their own business due to the adverse circumstances, such as loss of
spouses, divorce or financial hardship.

Lack of follow up and holding support (i.e. Capital, market linkages, technical information and
marketing techniques) after receiving Entrepreneurship development training.

A risk averse mindset.

Inadequate capital.

Networking problem (i.e. with raw supplier to buyer of products)

Insufficient management and marketing skills.

Low level of motivation and courage.

Lack of support from male members (of the families) as well as banks
64

Large magnitude of the target group of poor people.

Attitudinal rigidities.

Difficulty in creating awareness among people.

Limited resources with the NGOs.

Large requirements of training and sensitization of issues.

Limited number of experienced intervention agencies.

Diversities of situations due to wide coverage.

OVERCOMING THE CHALLENGES

The challenges faced by the women entrepreneurs can be overcome with the help of the following
measures

Creating the Importance of Entrepreneurship program and skills training, and MF and support
under single roof.

Training programme operating in several states helped NGOS-MFIs provide their microfinance
clients different set of skills for successfully running enterprises.

Provide micro credit for livelihood support and to micro enterprises development.

Encouraging women entrepreneur to utilize the loans for productive purposes and have the
potential to become entrepreneur.

Establishing a network of SHG to serve as a self-help community for micro enterprises

development activities.

Social recognition of women leading an enterprise.

Developing female mentors, trainers and advisors.

Establishing sources of credit.

Objective 4:-To study potential hurdles in the developing of women entrepreneurship.

Role of Microfinance Services:1. Do not restrict loan use: - Access to financial services provides the poor with the opportunity to
accumulate assets, to reduce their vulnerability to shocks (such as illness or death in the household,
crop failure, theft, dramatic price fluctuations, the payment of dowries) and to invest in incomegeneration activities. It also enables them to improve the quality of their lives through better education,
health and housing. One of the most important roles of access to credit is that it enables the poor to
diversify their incomes. Most poor households do not have one source of income or livelihood. Instead
they pursue a mix of activities, depending on the season, prices, their health and other contingencies.
This may include growing their own food, working for others, running small production or trading
businesses, hunting and gathering, and accessing loans.
65

What to do?
Microfinance organizations should allow for the fact that microentrepreneurs have a variety of uses for
funds, not only for the activity for which a loan is formally given but also for household operations and
other family enterprises. It would be too risky for the poor, particularly the poorest of the poor, to
invest all their income in a single activity. If the single activity or enterprise failed, the consequences
of this would be much greater than if they had several sources of income. Providers of quality financial
services recognize this and place relatively few restrictions on loan use. Most microfinance
organizations do not monitor client loans to ensure that the loan is being used for its stated purpose
because they recognize that it is part of the survival strategy of poor clients to make an on-going
stream of economic choices and decisions. The clients themselves know how best to manage their
funds.
Example: Kamala Rani's diversified activities (Bangladesh). Kamala Rani is an experienced borrower.
She has taken loans three times. She invested her small, first loan (1,000 taka) in her husband's
business. He trades in bamboo and sells bamboo products in his shop. Kamala also provides labour to
make bamboo mats. When she obtained her second loan (2,000 taka), she used it to make large
containers for storing crops and other products, which she sells fromhome to wholesalers and villagers.
Next she borrowed another 4,000 taka, primarily to buy a cow. She can repay her loan from her profits
from selling milk and from her investment in her husband's business. She still makes mats and other
bamboo products, which she plans to sell at the end of the year, when the price of the mats will go up.
She can take advantage of this increase in the price of the mats because she has other sources of
income to make her weekly loan instalment payments. Like other low- income clients, Kamala Ranis
diversified activities enable her to maximize returns from investment.
2. Provide access to financial services, not subsidies:For microenterprises, the most common constraint is the lack of access to working capital to grow their
business. Low-income entrepreneurs want rapid and continued access to financial services rather than
subsidies, and they are able and willing to pay for these services from their profits. Most micro
entrepreneurs borrow small amounts for short-term working capital needs. The returns from their
economic activities are normally sufficient to pay high interest rates for loans and still make a profit.
Micro entrepreneurs value the opportunity to borrow and save with MFIs since they provide services
that are cheaper than those that would normally be available to poor clients or that would be entirely
unavailable to them. Moneylenders charge very high interest rates, often many times the rate charged
by MFIs, and the moneylenders' terms may not be suited to the borrower. Micro entrepreneurs have
consistently demonstrated that they will pay the full interest cost to have continued access to financial
services from MFIs.
What to do?

66

MFIs cannot afford to subsidize loans. If the organization is to provide loans on an on-going basis, it
must charge interest rates that allow it to cover its costs. These costs tend to be high because providing
unsecured, small loans costs significantly more than loans in traditional banking. The costs to the
institution include operating costs, the cost of obtaining the funds for loans, and the cost of inflation.
MFIs cannot rely on governments and donors as long-term sources of funding. They must be able to
generate their own income from revenues, including interest and other fees. Since the poor seek
continued and reliable access to financial services and are able and willing to pay for it, it is
advantageous to both the institution and the clients to charge interest rates that cover the cost of the
services
Examples: Client demand as an indicator. If clients repay their loans, pay full-cost interest rates and
remain in a programme as borrowers or savers, it is a very good indication that they value these
services. A detailed, independent review of the microfinance activities of the United Nations Capital
Development Fund (UNCDF) in Africa, Asia and Latin America found evidence that poor clients were
willing to pay the interest rates necessary to provide these services. Even when they have to pay the
full cost of those services, they use them and come back to use them again and again. Continued and
reliable access to credit and savings services is what is most needed. Subsidized lending programs
provide a limited volume of cheap loans. When these are scarce and desirable, the loans tend to be
allocated predominantly to a local elite with the influence to obtain them, bypassing those who need
smaller loans.In addition, there is substantial evidence from developing countries worldwide that
subsidized rural credit programs result in high arrears, generate losses both for the financial institution
administering the programs and for the government or donor agencies, and depress institutional saving
and, consequently, the development of profitable, viable rural financial institutions."
3. Financial services contribute to womens empowerment:Women entrepreneurs have attracted special interest from MFIs because they almost always make up
the poorest segments of society, they have fewer economic opportunities, and they are generally
responsible for child-rearing, including education, health and nutrition. Given their particularly
vulnerable position, many MFIs seek to empower women by increasing their economic position in
society. Experience shows that providing financial services directly to women aids in this process.
Women clients are also seen as beneficial to the institution because they are seen as creditworthy.
Women have generally demonstrated high repayment and savings rates.
What to do?
MFIs interested in serving women should understand the specific needs of women clients and attract
women as customers. Women often have fewer economic opportunities than men. Women also face
cultural barriers that often restrict them to the home (for example, the institution of the veil, or purdah),
making it difficult for them to access finance services.Women have more traditional roles in the
economy and may be less able to operate a business outside of their homes. Women also tend to have
67

disproportionally large household obligations. Loan sizes may need to be smaller, given that womens
businesses tend to be smaller than men's. They tend to focus on trade, services and light
manufacturing. Women's businesses are often based in the home and frequently use family labour.
Loans to women should allow women to balance their household and business activities, for example,
by not requiring that too much time be spent in meetings and holding meetings in convenient locations.
The gender of loan officers may also affect the level of female participation in financial services,
depending on the social context.
Examples:
Women and empowerment. Regardless of culture or national context, impact assessments have found
positive results for women with access to financial services. For instance, a study on the impact of
microfinance on poverty alleviation in East Africa, conducted by the UNDP MicroSave-Africa
programme, found that participation in a microfinance institution "typically strengthens the position of
the woman in her family. Not only does access to credit give the woman the opportunity to make a
larger contribution to the family business, but she can also deploy it to assist the husband's business
and act as the family's banker - all of which increase her prestige and influence within the household."
Access to networks and markets giving wider experience of the world outside the home, access to
information and possibilities for development of other social and political roles

Enhancing perceptions of women's contribution to household income and family welfare,

increasing women's participation in household decisions about expenditure and other issues and
leading to greater expenditure on women's welfare

More general improvements in attitudes to women's role in the household and community

Many programmes have had negative as well as positive impacts on women. Where women
have set up enterprises this has often led to small increases in access to income at the cost of
heavier workloads and repayment pressures.

Within schemes, impacts often vary significantly between women. There are differences
between women in different productive activities and between women from different
backgrounds.

Positive impact on non-participants cannot be assumed, even where women participants are
able to benefit. Women micro-entrepreneurs are frequently in competition with each other and
the poorest micro-entrepreneurs may be disadvantaged if programmes do not include them.

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CHAPTER 6
FINDINGS AND LIMITAIONS

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FINDINGS

Micro financial institutions play a very important role today to provide the micro finance to the
women entrepreneure. Mostly MFI provide the assistance to the women entrepreneur through
MFI- bank linkage programme.

SKS is the largest micro financial institute which providing the micro finance through different
ways. It also coming up with their IPO to get the more capital to increase their functioning

From the current situation we can understand that today the main focus of micro finance
industry is to empower the woman thats why more loans are provided to woman and on easy
terms.

From the total SHG more SHG are coming in which only women are member because women
can better run a business and his family.

Narega and SGSY Swaranjyanti Gram SwarojgarYojna are one of the schemes which are
introduced by the government to help the poor people Schemes are provided by the government
to poor people but there is less people who avail the benefit from these schemes.

There are many challenges face by women to doing the business as entrepreneur like lack of
capital, networking problems etc. But these challenges can be overcoming with the help of
Provide micro credit for livelihood support and to micro enterprises development, establishing
sources of credit.

With the help of relationship data we can see that there are more percentage of women SHGs
out of total SHGs. So that is good indicator for women entrepreneur.

The loan distributed data show increase the % of loan amount to women as compare to last
year. This show the economic development of women entrepreneur.

LIMITATIONS

TIME CONSTRAINT
Shortage of time was a very big constraint due to which some area of micro finance has been
included in the study.

RESOURCE CONSTRAINT
Availability of data was a constraint due to which only secondary data is considered, which is
available, and also there are some MFIs whose data was not available

SECONDARY DATA
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All the information available was from secondary sources and data was very vastto analyze
properly & accurately

WIDE AREA TO STUDY

Study being conducted was very wide & analysis require expertise knowledge &
skills which was lacking

NO DIRECT SOURCE OF INFORMATION AVAILABLE

The information is collected from indirect sources so in some information data is not available

FUTURE ANALYSIS
The whole study was based on historical data which was not much useful in analysis of present
and prediction of future.

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CHAPTER 7
CONCLUSION,
IMPLICATIONS AND
RECOMMENDATIONS

72

Conclusion
Traditionally women have been marginalized. A high percentage of women are among the poorest of
the poor. Microfinance activities can give them a means to climb out of poverty. Microfinance could
be a solution to help them to extend their horizon and offer them social recognition and empowerment.
Numerous traditional and informal system of credit that was already in existence before micro finance
came into vogue. Viability of micro finance needs to be understood from a dimension that is far
broader- in looking at its long-term aspects too.
A conclusion that emerges from this account is that micro finance can contribute to solving the
problems of inadequate housing and urban services as an integral part of poverty alleviation
programmes. The challenge lies in finding the level of flexibility in the credit instrument that could
make it match the multiple credit requirements of the low income borrower without imposing
unbearably high cost of monitoring its end use upon the lenders. A promising solution is to provide
multipurpose lone or composite credit for income generation, housing improvement and consumption
support. Consumption loan is found to be especially important during the gestation period between
commencing a new economic activity and deriving positive income.
India is the country where a collaborative model between banks, NGOs, MFIs and Womens
organizations is furthest advanced. It therefore serves as a good starting point to look at what we know
so far about Best Practice in relation to micro-finance for womens empowerment and how different
institutions can work together.
It is clear that gender strategies in micro finance need to look beyond just increasing womens access
to savings and credit and organizing self-help groups to look strategically at how programmes can
actively promote gender equality and womens empowerment. On the other hand, thank to women's
capabilities to combine productive and reproductive roles in microfinance activities and society has
enabled them to produce a greater impact as they will increase at the same time the quality of life of
the women micro-entrepreneur and also of her family.

SUGGESTION

Credit is important for development but cannot by itself enable very poor women to overcome
their poverty.

73

Making credit available to women does not automatically mean they have control over its use
and over any income they might generate from micro enterprises.

In situations of chronic poverty it is more important to provide saving services than to offer
credit.

A useful indicator of the tangible impact of micro credit schemes is the number of additional
proposals and demands presented by local villagers to public authorities.

Globalization will not be allowed to expand the gap between the rich and the poor. Affluent
countries cannot continue to dump aid on needy nations; developing countries must not be
permitted to ignore the needs of their impoverished population.

As the poor are vulnerable it is not sufficient for us just to provide micro credit, but to have a
series of support systems provided at the appropriate time.

Government can contribute most effectively by setting sound macroeconomic policy that provides stability
and low inflation.

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